BoJ: No limits, but some things are off-limits – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that the BoJ’s Kuroda said, “Needless to say, there is still ample space for further cuts in the negative interest rate and for an increase in size in the “quantity” dimension and the Bank has a broad range of policy options.”

Key Quotes 

“Many market observers agree that there is scope to cut rates further (although there is a debate on whether this is a good idea).  However, most market observers do not agree that there is much room to expand the quantity of asset purchases.  In particular, most think the BoJ is running out of space to continue buying JGBs at its current pace.

Kuroda made it clear that “The basic mechanism of monetary policy, whether it is conventional or unconventional, is to drive the real interest rate higher or lower than the “natural rate of interest”.

In other words, while there are negative consequences of driving down yields, probably flattening the yield curve as the lower bound for interest rates is approached, the central bank has no other choice but to do so to achieve a goal of higher inflation.

He said, “It is often argued that there is a “limit” to monetary easing, but I do not share such a view.

Needless to say, there is a limit in the sense that there are things that “cannot be done legally” or “should not be done,” such as directly underwriting government bonds and monetizing fiscal deficits. As I said earlier, however, even within the current framework, there is ample room for further monetary easing in either of three dimensions — quantity, quality, and the interest rate — and other new ideas should not be off the table.”

In this paragraph, Kuroda suggests there is no intention to conduct so-called helicopter money policy, saying this is not legal and “should not be done”.

He continues to argue that there is “ample room” in the current framework, although most observers dispute this, seeing the bank already near the boundaries of the pace of asset purchases.

Kuroda may be ready to look at “other new ideas” but most that have been floated are of marginal influence.”