BOJ Masters Yield Curve But Inflation Failure Draws Critics

Updated on
  • Swaps show inflation in five years staying far below 2% target
  • BOJ owned 41% of outstanding government bonds at end of June

While the Bank of Japan has successfully controlled the yield curve over the past year, it has failed to spur inflation and is facing criticism from former officials for its price target and debt purchases.

The central bank has kept the 10-year bond yield around its target of zero percent since introducing its yield-curve control policy last September, while managing to bring down spending below its annual guidance of about 80 trillion yen ($712 billion). While the economy is enjoying its longest expansion since 2006, inflation remains stuck at 0.5 percent, just a quarter of the BOJ’s 2 percent target.

The BOJ left policy unchanged Thursday, as forecast by all 45 economists surveyed by Bloomberg. The benchmark 10-year bond yield held at 0.03 percent after ranging between minus 0.015 percent and 0.15 percent in 2017.

The following are the key challenges the central bank is wrestling with as its struggles to revive the economy:

Inflation excluding fresh food turned positive in January and quickened to the fastest pace in more than two years in July. Still, expectations for future price growth remained subdued, with swaps showing investors think annual inflation will average just 0.31 percent during the five-year period starting five years from now.

“One country’s monetary policy doesn’t have much impact over inflation in globally connected economies,” said Satoshi Okagawa, a senior global market analyst at Sumitomo Mitsui Banking Corp. in Singapore. The BOJ has slowed bond purchases because there are fewer assets to buy and because it has a limited impact, he said.

Investors’ gross purchases of government bonds -- a gauge the BOJ uses to measure market liquidity -- has been trending lower. The central bank’s latest survey of financial companies showed 45 percent of the respondents said market function was “low,” while none called it “high.”

“The drop in market transactions is a side effect of the BOJ’s yield-curve control,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “The BOJ should take account of the risk that its balance sheet will be hit hard by a future exit from monetary easing.”

The BOJ owned 41 percent of outstanding government bonds at the end of the second quarter, compared with 37 percent in September 2016, according to the central bank’s flow-of-funds data. The year-on-year increase in its bond holdings slowed to 65.4 trillion yen in August, the least since the start of 2015, from 78 trillion yen in September last year.

The BOJ on Thursday maintained its commitment to increase JGB holdings by about 80 trillion yen a year.
“The fact that the BOJ kept the 80 trillion yen JGB pace despite widespread awareness that it’s not buying nearly so many JGBs suggests fear that changing or dropping this target would cause a surge in the yen,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney.

— With assistance by Netty Idayu Ismail

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