BOJ to forgo July rate hike, taper US$152bil per year, says ex-policymaker

TOKYO: The Bank of Japan is likely to trim bond buying by around 24 trillion yen ($152 billion) annually in new guidance due next month, but forgo raising interest rates at least until September, former board member Makoto Sakurai said on Monday.

At its policy meeting on Friday, the BOJ decided to start trimming its huge bond purchases and announce a detailed plan in July on reducing its nearly $5 trillion balance sheet, taking another step toward unwinding its massive monetary stimulus.

Governor Kazuo Ueda gave few clues on how much the BOJ will actually trim its bond buying, saying only that the taper size will be significant.

“The BOJ has the option of reducing its monthly purchase amount by just one trillion yen. But with the governor having said the size would be ‘significant,’ there’s a good chance it will taper by around 2 trillion yen,” Sakurai told Reuters in an interview.

The BOJ currently buys roughly 6 trillion yen of government bonds per month with an allowance of 5-7 trillion yen. It will likely trim the purchase to 4 trillion yen per month, he said.

The BOJ’s decision to announce its bond-tapering plan at its next meeting in July 30-31 has heightened uncertainty on whether it will hike short-term interest rates at the same meeting, or hold off until later in the year to avoid upending markets.

Sakurai, who retains close ties with incumbent policymakers, said the BOJ will likely forgo raising rates in July and wait for more clarity on whether summer bonus payments and wage gains will help consumption will rebound.

“The BOJ is probably in no rush to raise short-term rates as doing so would push up mortgage loan rates and hurt already weak housing investment,” Sakurai said. “The next interest rate hike will likely happen in autumn or early next year.”

If economic and price developments move roughly in line with its projection, the central bank may raise interest rates to 0.5% by the end of next year, Sakurai said.

After ending eight years of negative interest rates in March, the BOJ currently sets the short-term policy rate target in a range of 0-0.1%.

Many economists expect the BOJ to hike interest rates to 0.25% this year, though they are divided on whether it will come in July or later in the year.

Sakurai said the yen’s sharp falls likely forced the BOJ to proceed quicker than initially planned in embarking on quantitative tightening (QT) and scale back its balance sheet.

Japan’s battered currency has become a headache for policymakers by inflating import prices, which in turn boosts living costs and hurting consumption.

Rather than trying to slow the yen’s declines through rate hikes, the BOJ likely opted to allow long-term interest rate to rise more by announcing a bond tapering plan, he added.

“The BOJ made a big step forward in normalising policy by deciding to taper,” Sakurai said, adding that many bankers likely saw the need to steadily trim its balance sheet.

“In a way, the weak yen helped BOJ policymakers get what they wanted.” – Reuters