BOJ Must Clarify Yield Control, Morgan Stanley’s Feldman Says

  • Market confused about policy implications after shift
  • BOJ targets yield of about zero for 10-year government bonds

Feldman: Not Unorthodox for BOJ to Target Yields

The Bank of Japan needs to clarify its next policy steps after saying it will seek to control the yield curve for Japanese government bonds, said Robert Feldman, chief economist at Morgan Stanley MUFG Securities.

The BOJ announced last week it would switch the focus of its bond purchases to targeting yields across a range of maturities, from simply expanding the monetary base, aiming to keep the yield on benchmark 10-year debt at around zero. The decision has left market participants looking for clues as to how the BOJ will implement its new policy and the impact it may have on asset purchases.

Governor Haruhiko Kuroda expressed concern that the recent excessive flattening of the curve -- when the spread between short-term and long-term yields shrinks -- was threatening to undermine efforts to spur the economy as it battles chronic deflation.

“I want them to have a bit more clarity in the formula that they’re using to set the yield target,” Feldman said in a Bloomberg Television interview with Tom Keene and Francine Lacqua on Tuesday. “I don’t think they know precisely whether the 80 trillion yen ($797 billion) that Governor Kuroda set is consistent with zero rates. They don’t know if that’s exactly the right number.”

The BOJ has been the most daring of global central banks in using a range of monetary stimulus tools to confront deflationary pressures and stagnation, but it faced a backlash it introduced negative rates in January. That move set off gains in the yen, which inhibit inflation, and drove yields to unprecedented lows, with those on 20-, 30- and 40-year bonds all below 0.1 percent in early July.

The latest yield control policy could help it manage the impact of its previous steps on banks, which have seen their margins squeezed by the narrowing of the gap between short-term and long-term yields.

After the central bank’s decision on Sept. 21, Governor Kuroda said the BOJ hadn’t reached the limits of its bond purchases, noting that the bank will stick to its target of 80 trillion yen a year for now. Even so, Kuroda argued the amount could be tweaked pegged to developments in the broader economy and financial markets. The BOJ owned 36 percent of outstanding JGBs at the end of June.

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