BoJ Modifies Yield Curve Control

The Bank of Japan decided to bring more flexibility to its yield curve control policy as strictly capping the long-term yields entail large side effects and the central bank retained its negative interest rate.

The BoJ policy board, led by Governor Kazuo Ueda, decided to regard the upper bound of 1.0 percent for 10-year JGB yields as a ‘reference’ in its market operations.

The bank dropped the wording that the 10-year JGB yields will fluctuate between plus and minus 0.5 percentage points from the target level.

The BoJ board decided to retain a negative interest rate of 0.1 percent on current accounts that financial institutions maintain at the central bank.

The board will also continue to purchase necessary amount of JGBs without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

Strictly capping long-term yields by fixed-rate purchase operations at 1.0 percent for consecutive days could have large side effects, the board noted.

Policymakers said the bank will control the yields mainly through large-scale JGB purchases and nimble market operations.

The policy announcement indicates that the YCC is now de facto over, but it remains to be seen how rapidly the Bank will slow its bond purchases, Capital Economics economist Marcel Thieliant said.

The economist added that policymakers will call time on negative interest rates as soon as January.

In the latest Outlook for Economic Activity and Prices, the BoJ said underlying inflation will rise gradually toward achieving the price stability target of 2 percent. However, this increase needs to be accompanied by an intensified virtuous cycle between wages and prices.

The bank raised its inflation outlook for fiscal 2023, 2024 and 2025. The projection for the fiscal 2023 was lifted to 2.8 percent from 2.5 percent as cost increases were passed on to consumer prices to a greater extend that expected.

Citing a rise in crude oil prices, inflation forecast for 2024 was revised to 2.8 percent from 1.9 percent. Inflation in the fiscal 2025 was estimated at 1.7 percent, up from 1.6 percent projected in July.

The BoJ has lifted the growth outlook for the fiscal 2023 to 2.0 percent from 1.3 percent, while the forecast for 2024 was downgraded to 1.0 percent from 1.2 percent. The projection for 2025 was retained at 1.0 percent.

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