Bank of Japan money target up for debate in policy review: sources

Mon Aug 15, 2016 2:59am EDT
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By Leika Kihara

TOKYO (Reuters) - The Bank of Japan's policy review could put up for debate its target for expanding base money through massive asset purchases, sources say, but the challenge would be to avoid spooking bond markets used to years of unprecedented buying.

The BOJ's announcement last month of a thorough review of its policy and its effects triggered a sharp bond sell-off as investors feared the central bank, wary of its dwindling policy tools, might lean toward reducing its government bond purchases.

It is currently buying roughly 110-120 trillion yen in bonds each year to meet its pledge to expand base money - or cash and deposits in circulation - by an annual 80 trillion yen ($790 billion).

But after initial successes in the asset-buying program, which is aimed at ending two decades of deflationary pressure, prices are falling again.

Sources told Reuters last week that the BOJ had already prepared an outline of the review that will maintain its pledge to hit 2 percent inflation as soon as possible.

That suggested that the most likely outcome of the review might be modest fine-tuning of its "quantitative and qualitative easing" (QQE) program, which combines buying bonds and riskier assets with negative interest rates.

Tweaks might include changing the average duration of bonds the BOJ holds, currently between seven and 12 years, so that the central bank has more flexibility over which bonds to buy when assessing market supply and demand.

But sources familiar with the BOJ's thinking say a more radical makeover of the program isn't off the table.   Continued...

A man rides a bicycle past the Bank of Japan (BOJ) building in Tokyo March 18, 2009. REUTERS/Yuriko Nakao/File Photo