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BOJ not targeting any particular reserves level

Written by: Staff
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TOKYO, June 5 (Reuters) The Bank of Japan is not targeting a particular level of reserves as it draws down excess liquidity from the banking system, and reaching a certain level will not be taken to mean conditions are right for a rise in interest rates, a senior BOJ official said on Monday.

''Reaching a certain level for the balance of current account deposits does not in itself indicate that the conditions are set for a rate increase,'' Hiroshi Nakaso, director-general of the BOJ's financial markets department, told Reuters in an interview.

''Fundamentally, we will lower the balance of current account deposits to the extent possible in line with our policy directive of keeping the overnight call loan rate effectively at zero,'' he said.

The BOJ has pledged to keep the key overnight lending rate near zero as it soaks up the excess cash it pumped into the banking system under its super-loose ''quantitative easing'' policy that ended in March.

Markets expect the BOJ to raise rates from zero as early as July on the back of a firmer economy and rising prices.

Nakaso, who oversees the BOJ's open market operations, said the current account balance would probably settle somewhat higher than the level of required reserves, which would put the balance near 6 trillion yen (.78 billion).

''We do not have a certain level in mind (for the balance of current account deposits). It is difficult to say in advance what level will constitute the end of reducing excess funds, as liquidity demands among financial institutions are not uniform,'' he said.

''The balance should be 6 trillion yen plus alpha, but we don't know how much the alpha will be. There will be some fluctuation due to daily fund demand.'' The balance is currently around 13 trillion yen (6.5 billion), down from a peak of 30-35 trillion yen when quantitative easing was in place.

He also confirmed that the BOJ would like to see the uncollateralised overnight call loan trading between zero and 0.1 percent -- the level of the official discount rate -- under the current directive.

MARKET VOLATILITY Nakaso did not express discomfort about divergent market views on the rate outlook and some rise in market volatility.

Volatility has increased as markets speculate on the timing of when the BOJ will end the era of zero interest rates.

''There seems to be no convergence in market expectations for the timing of an end to zero interest rates,'' he said. ''It is not unnatural for market views to be divided and for volatility to somewhat increase.'' Most recently, speculation of a rate increase in June prompted rates to rise until comments by BOJ Governor Toshihiko Fukui last month quashed such speculation.

''It is up to the Policy Board to decide when to lift zero interest rates. The Board members have repeatedly communicated with the market that they do no hold any pre-conceived notions about it.'' Separately, the BOJ briefly injected funds into the banking system late last month as money market rates jumped on projected fund shortages stemming from tax payments and government bond issuances.

Nakaso attributed the rise in rates to such factors, saying they had inhibited the smooth circulation of funds.

''On that backdrop of funds not circulating well, we conducted fund-supplying operations for same-day settlement,'' he said.

Rates fell after the BOJ's additional fund injections, and money market players expect the central bank to gradually reduce the current account balances again, keeping upward pressure on the overnight call rate.

Several other BOJ officials have said they do not expect the drawdown of the current account balances to stop at current levels.

At the same time, they say it would be wrong to assume that the BOJ would wait to finish absorbing excess funds before ending zero interest rates.

On a recent decline in global stock and currency markets amid increased volatility, Nakaso said there has been a wide range of cross-border capital flows amid globalisation, and the BOJ will watch moves by hedge funds and other institutional investors which sometimes act on short-term speculation.

''We will closely monitor such flows to look at their impact in international capital flows.'' REUTERS PV SSC1557

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