BOJ to think about ways to make the stimulus sustainable in the midst of low inflation

The central bank failed to break Japan's deflationary mentality despite years of printing heavy money, with stubbornly low inflation undermining its ammunition and overall darkening trade difficulties the prospects of an economy dependent on exports.

(Graphic: BOJ urges talk of change in yield curve control – https://tmsnrt.rs/2JYsmFZ)

But there is uncertainty about how long it can support current policy ultra-easy given the strain close- zero rates are inflicted on Japanese banks and the bond market.

The board of directors of the BOJ, consisting of nine members, will discuss ways to address conflicting challenges, with options such as adjustments to its buying techniques. assets and advice on its performance objectives.

Changes, albeit small, would be the last sign Governor Haruhiko Kuroda moves away from his radical stimulus program five years ago to shock the public with deflation.

"The BoJ could lose confidence in its ability to raise inflation and if it had confidence, it could continue to assert that inflation will reach 2% at some point," Izuru Kato said. , chief economist at Totan Research.

"The only lasting solution for the BOJ would be to make its inflation target a long-term goal, but it could take time and prove difficult."

When revising Tuesday's two-day rates, the board will also discuss how trade tensions between the United States and China could affect world trade and the economy dependent on Japan's exports. , according to analysts.

Data released Tuesday showed manufacturing output fell 2.1% in June to mark the second consecutive month of decline, although manufacturers plan to increase production in July and August reflecting the strong global demand.

THE JITTERY IN THE BEFORE BOJ

Expectations that the Bank of Japan could announce an improvement in its monetary stimulus have weighed on global bond markets, with the 10-year US Treasury yield hitting a six-week high of just under 3% Monday.

Japan's 10-year yield reached its highest level in nearly a year and a half Monday, forcing the BOJ to conduct a special bond purchase transaction for two consecutive sessions .

As part of its policy of controlling the yield curve (YCC), the Bank of Japan is committed to directing short-term rates to minus 0.1% and bond rates to 10 years around 0%.

She also buys risky assets such as exchange-traded funds (ETFs) and corporate bonds, and maintains a promise to increase her holdings in government bonds by 80 trillion yen ($ 720.79 billion) a year.

Many decision-makers in the Bank of Japan are wary of growth rates, with inflation remaining far from their target and markets are nervous in every respect that central banks are reducing their stimulus packages.

The central bank could instead modify its guidance on performance targets to signal that it would allow rates to fluctuate more flexibly, the sources said.

It can also change the way it buys risky assets such as ETFs, signaling that its purchases are distorting markets.

The BOJ meeting will precede the review of two-day US Federal Reserve rates until Wednesday, which should confirm the prospects for further gradual rate hikes.

In a quarterly review of its projections Tuesday, the Bank of Japan is expected to cut its price forecast and admit that inflation may not reach its target for another three years.

Governor Kuroda is expected to hold a press conference at 15:30. (0630GMT) to explain the political decision.

(Edited by Sam Holmes)