TOKYO (AFX-ASIA) - Nikko Salomon Smith Barney chief strategist Kazuhiko Sano said the Bank of Japan is expected to return to its zero call rate policy regime, and may explore uncharted monetary policy. "The market is expected to start pricing in the likely reduction in the overnight call rate back to zero, now that the rate was cut to 0.15 pct," he said.
"Such a move should further prolong the ongoing bull run in the government bond market ... by lowering funding costs among financial institutions (for asset allocation)."
However, Sano said the BoJ's monetary easing may not end even after the call rate effectively returns to zero.
"The zero means that there is nothing more in terms of levels of interest rates," he said.
"But this time, the zero may be merely the beginning of non-traditional monetary policy."
Sano said the BoJ may be forced to adopt a genuine quantitative monetary policy this time to stave off deflationary pressure that may result from their efforts to solve Japan's prolonged bad loan problem. He said he supported the BoJ's decision today, but added that the central bank probably wanted to take such policy steps "at a later date".
However, "apparently, the market cornered the BoJ (into making) the decision."