Bank of Japan Implements Flexible Bond Yield Control Policy, Signals Shift Away from Massive Monetary Stimulus
Tokyo, Japan – The Bank of Japan (BOJ) announced on Friday that it is slowly shifting away from decades of massive monetary stimulus as the country experiences an uptick in inflation and economic growth. This move allows Japan’s interest rates to move more freely and could have significant implications for global financial markets. Analysts believe that this shift brings Japan more in line with other major central banks, which have been aggressively raising rates to combat inflation.
While the BOJ kept interest rates at ultra-low levels and emphasized the need to support the economy, it made adjustments to its bond yield control policy to allow for more flexibility. The new scheme, called the bond yield curve control scheme (YCC), will enable the BOJ to respond quickly to risks such as rising price pressures in the world’s third-largest economy.
BOJ Governor Kazuo Ueda clarified that the changes were not a step towards policy normalization but rather a measure to address potential risks. Most major central banks, including the U.S. Federal Reserve and the European Central Bank, have been raising interest rates over the past year to combat inflation. In contrast, the BOJ has maintained its rates, putting pressure on the yen.
The BOJ’s decision to tweak its bond yield control policy is seen as an important step towards its eventual disbandment. The central bank kept its short-term interest rate target at -0.1 percent and its 10-year government bond yield target around 0 percent. However, it modified its guidance by allowing the 10-year yield to move 0.5 percent around the 0 percent target.
The BOJ also announced that it would offer to buy 10-year Japanese government bonds at a fixed-rate of 1 percent in operations. This signals that the BOJ is now willing to tolerate a rise in the 10-year yield to as much as 1 percent.
The announcement surprised financial markets, causing Japan’s benchmark bond yield to soar to a nine-year high. The yen also reached a week-high against the dollar, while Japanese banking stocks surged to an eight-year high.
The BOJ’s shift could have implications for global money flows and asset price trends, as the cheap yen has been used for capital market funding for years. However, some analysts believe that the BOJ’s language change suggests openness to future adjustments rather than an immediate shift in targets.
BOJ Governor Ueda stated that the central bank’s decision was driven in part by an overshoot in inflation expectations and the need to maintain a balance between higher inflation and supporting economic recovery. The BOJ’s quarterly outlook report revised up this year’s core consumer inflation forecast to 2.5 percent from the previous 1.8 percent projection.
While the BOJ’s price forecasts for 2024 and 2025 remained relatively unchanged, the central bank highlighted potential upside risks. Ueda reassured that the BOJ would respond appropriately if inflation overshoots their target.
The BOJ’s latest move comes as global central banks continue to raise interest rates, potentially leading to further yen declines and higher import costs and inflation for Japan. The bank acknowledged the challenge of balancing these risks while supporting economic recovery. The adjustments to the bond yield control policy aim to preempt volatility caused by unexpected inflation.
Since introducing the yield control scheme in 2016, the BOJ has faced little difficulty in controlling bond yields due to low inflation. However, last year’s increase in commodity prices pushed inflation above the 2 percent target, resulting in attacks on the yield cap. The BOJ widened the yield band in December 2017, allowing the 10-year yield to rise by up to 0.5 percent.
BOJ Governor Ueda stressed that the changes were made to avoid a repeat of the turbulence seen in the bond market in December 2017. The BOJ aims to have market forces play a greater role in driving bond yield movements while taking preemptive measures to avoid excessive volatility.
Despite the BOJ’s decision, board member Toyoaki Nakamura dissented, arguing that the timing for making the yield control scheme more flexible was premature.
The BOJ’s shift in policy has garnered attention from global financial markets, which anticipate further changes as the bank navigates inflation pressures and economic growth.
