- BOJ only specified a yield for 10-year government bonds
- New tools mean officials can buy at any time, in any amount
The Bank of Japan this week made clear it is now targeting the yield curve. What it didn’t make clear was exactly what that target is.
In its policy statement Wednesday, the BOJ only specified two rates along the yield curve, which is a distribution of the annualized rates of return on government securities from bills that could mature tomorrow to bonds that aren’t due for 40 years.
One of the two rates specified isn’t even technically on the yield curve. That short-term target is the minus 0.1 percent rate that the BOJ placed on a portion of the cash reserves that commercial banks park at the central bank. The long-term target rate was set at around zero percent for 10-year government bonds.
Without clear targets across the curve, it will be the BOJ’s actual purchases of securities that may reveal most about where the bank wants yields to be. That puts a spotlight on a monthly statement that up to now hasn’t had much attention, one that details securities planned for purchase in the coming month. The next one is due at 5 p.m. Tokyo time on Friday, Sept. 30.
The purchases are conducted by the Financial Markets Department -- run by Masayoshi Amamiya, the same senior official who runs policy planning -- which was the group that produced the comprehensive policy review that resulted in the shift to yield-curve targeting.
The two rates the BOJ did specify serve as anchors for the yield curve, as does the BOJ’s new pledge to keep easing until inflation overshoots its 2 percent inflation target, something that economists don’t see happening for years to come. If the overnight rate then is poised to stay around minus 0.1 percent for years, it would make sense for yields on bills and notes coming due in the medium term not to drift too far from that.
Somewhat hidden in the BOJ’s policy statement was also a reference to where the board thinks 20-year Japanese government bond yields should be. In a footnote, policy makers said that, if there were a spike in yields, the bank would buy securities “for example, those with regard to 10-year and 20-year JGB yields -- in order to prevent the yield curve from deviating substantially from the current levels.”
Yields on 20-year bonds were around 0.4 percent when the BOJ set policy. They dropped 5 basis points to 0.365 percent as of 10:14 a.m. Friday.
Next Friday’s release isn’t the be-all, end-all for BOJ purchases, though. The bank isn’t limited just to carrying out the plans outlined in its monthly statement. It said Wednesday that it will on an “as needed” basis buy bonds -- “mainly on-the-run issues,” or the most-recently sold securities by the Ministry of Finance -- in unlimited amounts at designated yields.
For Amamiya’s markets crew, what had been a somewhat mechanical task -- a quantity-based purchase assignment -- now becomes much more complex. The officials will need to monitor fluctuations in yields and be ready to jump into the market to keep the yield curve from getting out of whack from what policy makers intended.
Officials can also tap a beefed-up lending facility to influence the market. The BOJ already had the ability to lend cash to a bank for a year in return for JGBs as collateral. That power has now been extended to lending up to 10 years. In a sign of how drastically things have changed, BOJ officials just three years ago had been conflicted about whether to extend the lending power to just two years.
Though today’s traders have far more insight into central bank policy objectives, the practice of divining where officials want yields has echoes in history. Before then-Federal Reserve Chairman Alan Greenspan started releasing statements on targets for benchmark U.S. interest rates in the 1990s, it was up to market participants to calculate based on the Fed’s open-market operations.
Besides watching BOJ actions to reach conclusions on its desired yield-curve shape, market operations may increasingly give clues about the magnitude of balance-sheet expansion it wants. Before Wednesday, Governor Haruhiko Kuroda and his colleagues had been pursuing an annual target of adding 80 trillion yen ($794 billion) to the monetary base, through JGB buying.
For now, that target remains, sort of. The policy statement said JGB purchases will continue “more or less in line with the current pace,” though Kuroda said at a press briefing that 80 trillion yen isn’t fixed. Only actual purchases will tell for sure.
Meantime, the BOJ’s other stimulus initiatives -- buying things including exchange-traded funds, real-estate investment trusts and corporate bonds -- effectively become like legacy assets at a company. They join other legacy programs including a venture-capital style fund and a facility that provides lenders with cash to extend on to borrowers, which date from Kuroda’s predecessor.