WASHINGTON (Reuters) - Bank of Japan Governor Haruhiko Kuroda said on Monday the central bank will pay close attention to the impact heightening global uncertainties and jittery market moves could have on Japan’s economy in guiding monetary policy.
Kuroda also said central banks do not need to be too pessimistic about their ability to stimulate the economy with additional monetary easing, even if faced with a substantial decline in the natural rate of interest.
“Recently, uncertainties regarding the global economy have been heightening, and some nervousness has been seen in global financial markets,” Kuroda said.
“We will carefully examine various risk factors, in addition to developments in economic activity and prices as well as financial conditions, and weigh the benefits and costs of the policy effects,” he said in a speech at a seminar hosted by the International Monetary Fund in Washington.
As major central banks shift to a more dovish approach on monetary policy, some market players expect the BOJ to ease as early as its rate review this month to prevent heightening global risks from derailing Japan’s economic recovery.
While preaching the benefits of unconventional steps, Kuroda warned it was “not easy” to continue with powerful easing for a long time due to the pain it exerts on financial institutions’ profits.
Another challenge was the difficulty of affecting public perceptions on future economic and price developments with forward guidance - or a pledge the central bank makes on future monetary policy moves.
In theory, central banks can produce monetary easing effects by affecting people’s behaviour with a commitment to keep policy ultra-loose for a long period of time, Kuroda said.
“In reality, however, people’s behaviour does not seem to change as much as the theory suggests, especially when the forward guidance horizon becomes longer.”
Among analysts betting on imminent action, some say the BOJ could strengthen a forward guidance it introduced in April that pledges to keep current ultra-low interest rates at least until the spring of 2020.
Under a policy dubbed yield curve control (YCC), the BOJ pledges to guide short-term rates at -0.1% and the 10-year government bond yield around 0% via heavy asset purchases.
Japanese-style interest rate caps are drawing interest from global central bankers worried about a downturn, including U.S. Federal Reserve officials grappling with how to bolster their options as prospects for the global economy darken.
Kuroda said YCC could be something other central banks could adopt in the future if they are stuck with subdued inflation and low interest rates for a prolonged period.
He noted that conventional wisdom argues that central banks should not try to control long-term interest rates, but with short-term rates at the zero lower bound, aiming at long-term rates is worth considering.
Targeting interest rate levels, rather than setting a target for the amount of government bond purchases, appeared to be a more sustainable and effective way to stimulate growth, he said.
“I think the Japanese experience could be utilized by other countries, depending on the circumstances,” he added.
From Japan’s experience, the key to controlling long-term rates successfully is to gain a strong presence in the government bond market, Kuroda said.
It is also important to develop and secure effective market operation tools to control yields, while finding ways to keep some market functioning alive, he added.
After years of heavy asset buying, the BOJ now owns more than 40% of the Japanese government bond market.
Reporting by Jason Lange in Washington and Leika Kihara in Tokyo; Editing by Andrea Ricci