Power shift at Japan’s central bank could mean QE-style plan

City A.M. Reporter
AHEAD of a Bank of Japan leadership change, central bankers are considering the possibility of shifting policy closer to the quantitative easing campaign of the last decade, hoping it will give policy the kick demanded by Prime Minister Shinzo Abe.

Instead of focusing on reducing interest rates the central bank would shift to expanding its balance sheet, said sources familiar with its thinking. Such a shift would bring the central bank closer to making the purchase of longer-dated bonds a central part of policy and partly echoes Japan’s five-year quantitative easing campaign that lasted until 2006, when it aggressively pumped cash into the economy.

“The BOJ’s current policy is still about controlling interest rates. Shifting that focus to balance sheet expansion will open up a lot of possibilities in terms of policy options,” said one of the sources.

Abe is demanding bolder steps from the central bank to help lift the economy out of deflation. In January, the central bank agreed to an inflation target of two per cent. Expanding the balance sheet is just one of several ideas central bankers are studying internally ahead of the BOJ leadership transition. Some still advocate sticking to a policy of nudging down interest rates further, such as by scrapping a 0.1 per cent floor set on money market rates.