TOKYO (Dec 7): Japan's central bank governor said on Thursday changes in the economy and financial system could trigger a hike in the bank's yield targets, a key monetary policy lever, offering the strongest signal to date it may edge away from crisis-mode stimulus.
Haruhiko Kuroda also said the Bank of Japan was "very mindful" of the health of regional banks hurt by its ultra-loose monetary policy, in his first such acknowledgment that the measures of recent years could jeopardise financial stability.
While it was too early to discuss specifics of an exit, he said the BOJ's future communication would focus on how to remove quantitative easing without disrupting financial markets.
"When considering our future communication with markets, an exit from quantitative and qualitative easing would be quite an important topic," he told a seminar in a sign the BOJ's next step would be to withdraw, not ramp up, stimulus.
Kuroda repeated that the BOJ considers the current shape of the yield curve to be appropriate, suggesting that he saw no immediate need to raise the bank's yield targets.
But for the first time, he said the appropriate shape of the yield curve, which the BOJ uses to try to stoke credit growth, could change depending on how the economy performs and how policy affects Japan's banking system.
"In accordance with such changes, we will consider where our short- and long-term rate targets should be in order to create an appropriate shape of the yield curve," Kuroda said.
Shift in policy priorities
The BOJ has been dropping subtle and intentional hints it could edge away from crisis-mode stimulus earlier than expected, sources say, nodding to growing criticism that prolonged easing was threatening to destabilise the banking system.
Some analysts say Kuroda may be laying the ground for an eventual exit from ultra-loose policy. But most of them surveyed by Reuters expect the BOJ to wait until later next year or beyond, with inflation distant from its target.
"This is the beginning of a change ... I don't think they will change the framework soon," said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management.
"If conditions allow, the BOJ could consider abolishing negative rates and raising the 10-year yield target to 25 basis points" in the first half of 2019 at the earliest, he said.
While rate hikes may be some time away, Kuroda's recent comments underscore a gradual but steady shift in the central bank's policy priorities, analysts say.
Kuroda said the BOJ was "very mindful" of the impact its ultra-easy policy was having on financial institutions' profits via narrowing margins, particularly on regional banks suffering from a lack of fund demand and a dwindling population.
"Both financial and price stability are important policy mandates for the BOJ. We will continue to make checks and do whatever it takes to maintain financial system stability," Kuroda said, emphasising for the first time the need to look not just at prices but the banking system.
It was a departure from Kuroda's approach since deploying a massive asset-buying programme in 2013, when he said the BOJ would do whatever it takes to hit its price goal even if it meant hurting bank profits.
After years of failing to lift inflation through its massive money printing programme, the BOJ revamped its policy last year to one targeting interest rates from the pace of asset buying. It now guides short-term rates at minus 0.1% and the 10-year bond yield around zero percent.