KYOTO, Japan (Reuters) – Bank of Japan Deputy Governor Masayoshi Amamiya said on Thursday the central bank will purchase government bonds “promptly and appropriately” if yields rise rapidly.
His comments came as Japanese bond yields JP10YTN=JBTC hit a 1-1/2-year high on Thursday with investors continuing to test the limits of the central bank’s new commitment announced two days ago to allow debt markets to move more freely.
Amamiya said while the central bank is aware of the potential demerits of its massive stimulus program, it would not reduce monetary support just because it is taking longer for inflation to hit its 2 percent target.
“There has been a growing concern in the government bond market that market functions have been deteriorating,” Amamiya said, explaining why the BOJ made the new commitment on Tuesday.
“But the target level of long-term yields remains at around zero percent,” he told a speech to business leaders in Kyoto, western Japan.
“The BOJ does not expect the level of yields to ratchet up,” he said, adding that the bank will step in to curb any sharp rise in yields as needed.
Under a yield curve control (YCC) program, the BOJ guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent.
The BOJ kept its yield targets steady on Tuesday but said it would allow long-term rates to move more flexibly. It also made tweaks to reduce adverse effects of its policies on markets and commercial banks, reflecting its view that its inflation target remains stubbornly out of reach.
Amamiya conceded that inflation will miss the BOJ’s target for another three years given Japan’s sticky deflationary mindset. But he stressed that the economy was sustaining momentum for price growth to accelerate toward 2 percent.
He said the best approach for the BOJ was to maintain its ultra-loose policy, while making tweaks to its program to look after the costs of prolonged easing.
“The effects of our monetary easing have been strengthened as a whole, in terms of sustainability,” he said of Tuesday’s measures.
Amamiya said the BOJ was mindful that by maintaining its ultra-easy policy, it was hurting financial institutions’ profits and that these costs were cumulative.
“There is no change to the BOJ’s intention of thoroughly examining risks considered most relevant to the conduct of monetary policy,” Amamiya said.
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