World News

Exclusive: Receding risks may give BOJ room to tweak forward guidance

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan could consider watering down later this year its commitment to keep or cut its rock-bottom interest rates, if pessimism over the global outlook continues to recede, sources say.

Any such tweak would be a sign Japan’s central bank is stepping back from the likelihood of expanding stimulus anytime soon, said three sources familiar with the BOJ’s thinking.

“If global economic growth shows clear signs of recovery around mid-year, there may be room to debate modifying the forward guidance,” one of the sources said on condition of anonymity because of the sensitivity of the matter.

The BOJ said in October it would maintain or cut its ultra-low interest rates as long as there were risks the economy would falter before reaching the bank’s elusive 2% inflation goal.

The move was aimed at countering criticism the BOJ was lagging other central banks in responding to overseas headwinds, such as the U.S.-China trade conflict.

Now some BOJ officials want to make their forward guidance on rates less binding, as overseas risks appear to subside, with Washington and Beijing agreeing on a truce in their trade war.

To be sure, no consensus exists within the BOJ yet, given uncertainty over the global outlook and the setback in consumption from last October’s sales tax hike.

Skeptics at the BOJ argue that tweaking the guidance too soon may backfire if subsequent data turn out weak, forcing the central bank to make an about-face that could undermine its credibility, the sources say.

BOJ Governor Haruhiko Kuroda on Tuesday did not rule out the chance of debating a tweak, but set the bar fairly high.

“If risks subside significantly and growth jumps up more than we project now, a review could be debated,” Kuroda told a briefing. “For now, it’s appropriate to maintain our policy stance based on our current growth and price projections.”

Still, many BOJ policymakers see the rate guidance as a softer commitment than other pledges the central bank has made, such as a promise to keep increasing the pace of money printing until inflation overshoots 2%.

That’s because the rate targets are tools the BOJ hopes to use flexibly in response to swings in the economy. Under yield curve control, the BOJ guides short-term rates at -0.1% and the 10-year bond yield around 0% as its main policy targets.

Leaving room to adjust the policy rates is key to BOJ policymakers worried about the rising cost and shrinking return of its prolonged ultra-easy policy.

“If overseas conditions improve significantly, the language of the guidance may need to change,” a second source said. “It’s not something that will happen immediately, but needs to be considered at some stage.”

(Reporting by Leika Kihara, additional reporting by Takahiko Wada; editing by Larry King)