BOJ Shifts Policy Framework to Targeting Japan’s Yield Curve

  • Board keeps benchmark interest rate unchanged at minus 0.1%
  • Monetary base may fluctuate as BOJ seeks yield-curve control

BOJ to Introduce QQE With Yield Curve Control

The Bank of Japan shifted the focus of its monetary stimulus Wednesday from expanding the money supply to controlling interest rates, which some economists deemed as further evidence that BOJ policy had reached the limits of its effectiveness.

The central bank said it would adjust the volume of its asset purchases, the core of its framework until now, as necessary in the short term to control bond yields, while keeping it at about 80 trillion yen ($780 billion) annually over the long term. The BOJ also scrapped a target for the average maturity of its holdings of government bonds.

Haruhiko Kuroda on Sept. 21.

Photographer: Kiyoshi Ota/Bloomberg

The changes will help the BOJ manage the impact of its purchases and negative interest rates on Japanese banks, whose profits have been squeezed by a narrowing of short-term and long-term yields. Governor Haruhiko Kuroda and the policy board kept that negative rate, imposed on a share of bank reserves, unchanged at minus 0.1 percent.

Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, saw the shift as a tacit admission by the BOJ that it has reached the limits of its JGBs purchases. The BOJ now owns more than a third of outstanding JGBs, with the pace of its buying draining the market of supply.

"If it takes additional easing in the future, it will probably deepen the negative rate," he said.

Kuroda’s Comments

Kuroda said the BOJ hadn’t reached the limits of its bond purchases, and that the new measures strengthened the previous framework instead of scrapping it. An excessive flattening of the yield curve could harm the economy, he said during a news conference.

"As for the amount of government bond purchases, it could increase or decrease, as it relates to the economy, prices and in particular the financial markets," he said.

The yen weakened against the U.S dollar before reversing to trade at 101.76 as of 6:26 p.m. in Tokyo. Japanese shares rose the most since July, with the Topix index 2.7 percent higher at the close.

Read here about a tweak to the BOJ’s purchases of exchange-traded funds.

Japan’s 10-year government bond yields hit positive territory for the first time since March. The 10-year JGB yield was at minus 0.035 percent on Wednesday in Tokyo, after climbing to as high as 0.005 percent, from minus 0.065 percent Tuesday, according to Japan Bond Trading Co.

Easing Rate Impact

The BOJ faced a backlash after first deploying negative rates in January. Bank shares tumbled at the time, the yen gained strength and household sentiment worsened.

Kuroda recently acknowledged that negative rates had cut into financial institutions’ profits by driving long-term yields lower, while pointing out that borrowing costs for businesses and consumers had also fallen. He also expressed concern about expected declines in returns on insurance and pension products, and the impact this could have on people’s confidence.

“The BOJ’s decision to steepen the yield curve showed they are taking into account the situation of financial institutions,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

Shares in Japanese banks surged as investors bet that the BOJ’s new framework would be less likely to erode commercial banks’ profits. The 87-stock Topix Banks Index surged 7 percent, the most since July 29, after the policy announcement. Mitsubishi UFJ Financial Group Inc., the nation’s largest lender, jumped 7.4 percent.

Policy Review

The BOJ has been the most daring of global central banks in using monetary stimulus to confront deflationary pressures and stagnation, but Kuroda recently began to publicly weigh the costs of its extraordinary easing against the benefits, a shift from his "whatever-it-takes" approach of the past three-plus years.

The decisions announced Wednesday followed a comprehensive review of its policies to assess their effectiveness and determine how to reach its distant 2 percent inflation target. They signal that the BOJ has taken a longer-term view of "reflating" Japan’s economy, and is focused for now on tweaking its policy framework with sustainability in mind.

The BOJ strengthened its forward guidance by pledging to continue expanding the monetary base until inflation is stable above the 2 percent target -- committing to an overshoot of consumer-price gains in an effort to revive inflation expectations.

Fed Meeting

The BOJ may yet decide to expand JGB purchases or cut the negative rate further as soon as its next meeting ending on Nov. 1. Some economists suggested it should wait until after the Federal Reserve’s rate decision later Wednesday before acting. A Fed rate hike, though deemed unlikely this month, would probably help the BOJ’s cause by weakening the yen versus the dollar.

Inflation indicators and expectations have sagged. Japan’s core consumer prices fell in July at the fastest pace since Kuroda took the helm of the BOJ in March 2013. Market participants this year have shrugged off Kuroda’s repeated vows that he would act whenever necessary, helping drive the yen to long-term highs. It has gained about 18 percent this year.

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