BOJ makes yield control policy more flexible, waters down rate cap

The Bank of Japan (BOJ) has made changes to its yield curve control policy in response to signs of creeping inflation and the side-effects of prolonged easing. At its two-day policy meeting, the central bank decided to keep its short-term interest rate target at -0.1% and the 10-year government bond yield target around 0%. However, it has now changed its guidance on the 10-year yield, stating that it will be a “reference” rather than a “rigid limit.” Additionally, the BOJ announced that it will offer to buy 10-year Japanese government bonds at a fixed rate of 1.0%, signaling its willingness to tolerate a rise in the 10-year yield. The bank emphasized the need to maintain ultra-loose policy in order to achieve its 2% inflation target. The BOJ also highlighted the high uncertainty surrounding the economic and price outlook, leading to the decision to enhance the sustainability of monetary easing through greater flexibility in yield curve control. Following the announcement, the dollar strengthened against the yen, the 10-year JGB yield rose to its highest level since September 2014, and the Nikkei stock average fell. Analysts noted that while the BOJ has introduced more flexibility in its yield curve control, the overall tone remains dovish, with no signal of policy tightening in the forecast horizon. The BOJ’s decision comes after the Federal Reserve’s recent interest rate hike, which further widens the interest rate gap between the US and Japan. The introduction of yield curve control in 2016 allowed the BOJ to easily control bond yields when inflation was below target. However, last year’s increase in inflation and rising commodity prices led to challenges in maintaining the yield cap. As a result, the BOJ widened the yield band and now allows the 10-year yield to rise by up to 0.5%. With wages and inflation on the rise, there has been speculation about potential adjustments to the yield curve control policy. Recent data showed that core consumer inflation in Japan’s capital slowed in July but remained above the BOJ’s 2% target, highlighting the increasing price pressure.