The Bank of Japan announced further adjustments to its yield curve control (YCC) policy on Tuesday, allowing 10-year Japanese government bond (JGB) yields to increase above 1% in a move that follows the weakening of the yen over the last year and a half.
The development is significant, as the central bank has long maintained its YCC policy — a strategy of buying up government bonds to control interest rates. Since July, the long-term interest rate has been capped at 1%, an increase over the previous ceiling of 0.5%. The move is in response to inflationary pressures and volatility concerns.
Amid economic uncertainties at home and abroad, BOJ Gov. Kazuo Ueda said having greater flexibility within the YCC policy would help curb side effects in financial markets in the future.
“We judged that it was appropriate to increase the flexibility in the conduct of yield curve control, so that long‐term interest rates will be formed smoothly in financial markets in response to future developments,”Ueda told a news conference.
The 10-year yield for JGBs, which had been hovering below 0.9% earlier this week, rose as high as 0.957% on Tuesday.
“We wanted to move earlier, before the yield rises to the cap (of 1%) and the side effects have developed,” Ueda said.
Inflation has long proved a challenge for the central bank. The BOJ has a target of stable 2% inflation, and this has been exceeded for 11 consecutive months.
The bank plans to continue YCC “as long as it is necessary for maintaining that (inflation) target in a stable manner,” it said.
Eight members of the nine-member policy board supported the decision, while Toyoaki Nakamura was opposed, saying the central bank should wait until companies’ earning power becomes stronger.
The YCC policy, sometimes referred to as ultraeasy, has left the BOJ out of step with the interest rate hikes set by other major central banks. This has also been criticized as leading to market distortions and weakening the yen.
Widening interest rate gaps between Japan and other markets have driven down the yen’s value and reduced overseas spending power.
The BOJ also revised upward its inflation forecasts and released its quarterly economic outlook.
In the outlook, the central bank warned of “extremely high uncertainties surrounding Japan’s economic activity and prices,” but said that Japan’s economy would continue recovering moderately.
Jason Wong, a senior markets strategist for the Bank of New Zealand, said policy tweaks were long overdue.
“BOJ monetary policy has been too easy for too long in the face of rising inflation and a developed world that has tightened policy considerably,” he said, noting that inaction risked “sending the yen on a weaker trajectory, which would then require some official intervention to contain the move.”
The weakening of the yen has remained a theme throughout the year. Inbound tourists have enjoyed higher spending power in Japan, but for workers facing slow wage increases and dwindling spending power amid the rising cost of imports, the depreciation has been viewed unfavorably.
Wong said the weak yen had made the Finance Ministry uncomfortable, noting that until the BOJ moves away from its ultraeasy policy stance, the yen will continue to be under selling pressure.
“Another tweak to yield curve control or its complete removal would support a stronger yen,” Wong said.
On Tuesday, Ueda reiterated that the ultraeasy monetary policy will continue until a vicious circle between wage increases and rising prices is established
“Wage negotiations between business and labor unions next spring would be a key point in the future,” he said.
BOJ officials have emphasized the importance of currency stability, offering cautious comments about intervention in an attempt to avoid shocking markets and deploy strategic ambiguity.
When the yen sank beyond ¥150 against the dollar earlier this month, its recovery sparked chatter that a quiet intervention had occurred.
But Finance Ministry officials, Chief Cabinet Secretary Hirokazu Matsuno and Finance Minister Shunichi Suzuki all declined to comment about whether an intervention had taken place.
Tuesday’s policy tweak suggests that Ueda, who took office in April, is slowly moving away from the sometimes controversial policy which he inherited from previous bank head Haruhiko Kuroda.
While Kuroda was at times criticized for an inability to effectively convey decision-making logic, limiting his ability to shape market expectations, Ueda has sought to project a sense of consistency, carefully choosing his words.
In September, Ueda suggested during an interview that the BOJ may possess enough data to decide whether to end the negative rate policy by the end of this year, prompting speculation that policy changes may be forthcoming. But even that hint was deemed too telling, with Ueda later saying he had not intended to offer any indication of the timing of any policy shifts.
Ueda and his team concluded the two-day policy meeting Tuesday — their penultimate meeting for 2023.
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