BOJ Unveils New Framework for Policy: Statement Highlights

  • ‘Yield curve control’ joins quantitative, qualitative easing
  • Policy makers adopt an ‘inflation overshooting commitment’

The following are excerpts from the Bank of Japan’s policy statement, released Wednesday in Tokyo.

New Framework for Strengthening Monetary Easing:
"Quantitative and Qualitative Monetary Easing with Yield Curve Control"

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan conducted a comprehensive assessment of the developments in economic activity and prices under "Quantitative and Qualitative Monetary Easing (QQE)" and "QQE with a Negative Interest Rate" as well as their policy effects, and compiled "The Bank’s View" as provided in Attachment 1. The Policy Board’s view on the current situation of and outlook for economic activity and prices is provided in Attachment 2.

Based on these, with a view to achieving the price stability target of 2 percent at the earliest possible time, the Bank decided to introduce "QQE with Yield Curve Control" by strengthening the two previous policy frameworks mentioned above. The new policy framework consists of two major components: the first is "yield curve control" in which the Bank will control short-term and long-term interest rates; and the second is an "inflation-overshooting commitment" in which the Bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI) exceeds the price stability target of 2 percent and stays above the target in a stable manner. Specifically, the Bank decided upon the following.

(1) Yield curve control

a) Guideline for market operations (by a 7-2 majority vote)
The guideline for market operations specifies a short-term policy interest rate and a target level of a long-term interest rate. The Bank decided to set the following guideline for market operations for the intermeeting period. The Bank will cut the interest rates further if judged necessary.

The short-term policy interest rate:
The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

The long-term interest rate:
The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent). With regard to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace -- an annual pace of increase in the amount outstanding of its JGB holdings at about 80 trillion yen -- aiming to achieve the target level of a long term interest rate specified by the guideline. JGBs with a wide range of maturities will continue to be eligible for purchase, while a guideline for average remaining maturity of the Bank’s JGB purchases will be abolished.

b) New tools of market operations for facilitating yield curve control (by an 8-1 majority vote)

The Bank decided to introduce the following new tools of market operations so as to control the yield curve smoothly

(i) Outright purchases of JGBs with yields designated by the Bank (fixed-rate purchase operations)

(ii) Fixed-rate funds-supplying operations for a period of up to 10 years (extending the longest maturity of the operation from 1 year at present)

(2) Guidelines for asset purchases

With regard to asset purchases except for JGB purchases, the Bank decided, by a 7-2 majority vote, to set the following guidelines.

a) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.

b) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

Inflation-overshooting commitment

The Bank will continue with "QQE with Yield Curve Control," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining the target in a stable manner.

The Bank will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds the price stability target of 2 percent and stays above the target in a stable manner. Meanwhile, the pace of increase in the monetary base may fluctuate in the short run under market operations which aim at controlling the yield curve. With the Bank maintaining this stance, the ratio of the monetary base to nominal GDP in Japan is expected to exceed 100 percent (about 500 trillion yen) in slightly over one year (at present, about 80 percent in Japan compared with about 20 percent in the United States and the euro area).

The Bank will make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target of 2 percent.

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Background to the introduction of yield curve control

As shown in the comprehensive assessment, QQE has brought about improvements in economic activity and prices mainly through the decline in real interest rates, and Japan’s economy is no longer in deflation, which is commonly defined as a sustained decline in prices. With this in mind, "yield curve control," in which the Bank will seek for the decline in real interest rates by controlling short-term and long-term interest rates, would be placed at the core of the new policy framework.

The experience so far with the negative interest rate policy shows that a combination of the negative interest rate on current account balances at the Bank and JGB purchases is effective for yield curve control. In addition, the Bank decided to introduce new tools of market operations which will facilitate smooth implementation of yield curve control.

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Possible options for additional easing

With regard to possible options for additional easing, the Bank can cut the short-term policy interest rate and the target level of a long-term interest rate, which are two key benchmark rates for yield curve control. It is also possible for the Bank to expand asset purchases as has been the case since the introduction of QQE. Moreover, if the situation warrants it, an acceleration of expansion of the monetary base may also be an option.

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