As yields creep up, Bank of Japan's Kuroda calls for 'stably low' rates

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda on Friday stressed the need to keep interest rates "stably low" to protect an economy ravaged by the COVID-19 pandemic, warning that prospects for a recovery were fraught with uncertainty.

Kuroda also said the central bank was already flexibly purchasing exchange-traded funds (ETF) under current guidelines, pointing to a recent slowdown in buying as Japanese stocks hover at multi-year highs.

"It's important now to keep the entire yield curve stably low as the economy suffers the damage from COVID-19," Kuroda told parliament, when asked whether the BOJ will allow long-term rates to deviate further from its 0% target.

"The BOJ has no intention of pushing up (10-year bond yields) above its target of around 0%," he said.

The remarks came as expectations of higher U.S. inflation sent global bond yields rising, pushing up the yield on the benchmark 10-year Japanese government bonds (JGB) to 0.175%.

It was the highest since January 2016, when the BOJ began adopting negative interest rates, and near the 0.2% level seen as the central bank's implicit ceiling.

Investors are focusing on whether the BOJ will step in to cap yields ahead of a scheduled review of its policy tools in March, which is partly aimed at allowing asset prices to be driven more by market forces.

"We suspect that if yields did rise to 0.2% before the March review, the Bank would conduct a fixed-rate auction to keep them inside the tolerance band," Capital Economics wrote in a note.

Under its policy of yield curve control, the BOJ guides short-term rates at -0.1% and 10-year JGB yields around zero. In 2018, it doubled the implicit band at which 10-year yields are allowed to move around its 0% target to 40 basis points.

Markets are rife with speculation the BOJ will allow yields to move at an even wider range in the March review.

Kuroda said the BOJ will look at ways to make its policy more flexible and effective. As part of such efforts, it will conduct an analysis on why prices failed to pick up, he said.

"The BOJ will examine the effects and side-effects of our asset purchases in hope of making them more effective and sustainable," Kuroda said.

"We're already buying ETFs flexibly because doing so is possible even under current guidelines."

The BOJ bought ETFs on Friday for the first time this month as Tokyo stock prices slumped, a sign the central bank is becoming more flexible with its asset purchases.

(Reporting by Leika Kihara; Editing by Chang-Ran Kim, Stephen Coates and Ana Nicolaci da Costa)

By Leika Kihara