The Bank of Japan Tweaked its Yield Curve Control in Another Step Towards Normalization

BoJ Tweaked YCC

The Bank of Japan is on the far dovish side of the policy spectrum with negative rates, qualitative and quantitative easing (QQE) and Yield Curve Control (YCC), in stark contrast with its major counterparts that have been tightening aggressively for more than a year.

Policymakers had opened the door to normalization in December, when they had surprised markets with their decision allow the 10-year JGB yields to rise up to 0.5%, before stepping in ^[1]. Today they took another step in that direction, further altering the YCC.

Although it kept the +/-0.5% target unchanged, the bank pledged to conduct Yield Curve Control (YCC) with "greater flexibility". It now views these bounds as "references, not as rigid limits" in its market operations, offering to purchase 10-year JGBs at 1%, instead of 0.5%. ^[2]

The move shows that the BoJ probably does not want to commit too much to a higher yield ceiling, but in effect loosened its grip on yields and widened the YCC. Market reaction was immediate, pushing the Japanese 10-year yields way past the previous threshold of 0.5%.

Source: www.tradingview.com

Other than that, officials maintained the ultra-loose policy setting with rates at -0.1% and qualitative and quantitative easing (QQE) unchanged. Even though they raised their median CPI (ex-fresh food) projection to +2.5% for FY2023 (from +1.8%) ^[3], they believe that "sustainable and stable achievement" of the 2% target "has not yet come in sight", requiring the continuation of monetary easing.

Speculation for a change or abandonment of the YCC has been mounting, as inflation is high and the Yen has been suffering from the sustained unfavorable monetary policy differential. However, Governor Ueda had repeatedly poured cold water to such expectations, appearing to prefer a continuation of the status quo.

Today's decision dents Mr Ueda's credibility and the "no-change change" nature of the YCC alteration creates some perplexity, at a time of broader uncertainty around the monetary policy outlook. The confusion was evident in the volatile initial reaction of the JPYBasket, which so far benefits from the move.