① On Tuesday (10/31), the Bank of Japan once again adjusted its rhetoric on the yield control policy (YCC); ② the central bank stated that the upper limit of 10-year treasury bond yield would be 1% “as a reference”; ③ the central bank also said it would implement flexible debt purchase operations to reduce yields.
Source: Finance Association
On Tuesday (10/31), the Bank of Japan once again adjusted its rhetoric on the yield control policy (YCC) and further relaxed its control over long-term interest rates. This means that the Bank of Japan is taking a small step towards withdrawing from large-scale monetary stimulus policies over the past 10 years.
On Tuesday afternoon, the Bank of Japan announced that it would maintain the benchmark interest rate at a historic low of -0.1% and maintain the 10-year Treasury yield target around 0%, in line with market expectations.
However, in its statement on the same day, the bank also said that the upper limit of 10-year Japanese bond yields will be 1% “as a reference”, which is one of the highlights of this monetary policy meeting.
After the Bank of Japan's decision was announced, the US dollar rose against the yen in the short term, breaking the 150 mark.
Increase the flexibility of YCC policies
At today's meeting, the Bank of Japan redefined 1.0% as a “loose upper limit” rather than a strict upper limit; andThe commitment to defend this level by buying unlimited bonds has been cancelledIn other words, the central bank will implement debt purchase operations in a flexible manner to reduce yields.
In a statement announcing this decision, the Bank of Japan stated, “Given the high level of economic and market uncertainty,It is appropriate to increase the flexibility of yield curve control... If the yield ceiling remains rigid, the side effects will be even greater.”
The Bank of Japan's monetary policy committee approved the decision with 8 votes in favor and 1 against. Only committee member Toyoaki Nakamura disagreed.
The decision highlights that rising global bond yields and continuing inflation are making it increasingly difficult for the Bank of Japan to stick to its controversial YCC policy.
At the July meeting of this year, the Bank of Japan announced the expansion of the target range for 10-year Japanese treasury bond yields to fluctuate within 0.5%-1%, but will strictly limit the 10-year Japanese treasury bond yield to fluctuate below 1% through fixed interest rate purchases.
Tom Nash, UBS Asset Management's Sydney-based portfolio manager, believes,”The truth is that they are withdrawing from YCC policy.” He expects Japan's yield to rise.
Nash also said, “If you change the upper yield limit every time the market approaches (upper limit), then this is no longer the upper yield limit.”
After the Bank of Japan's statement was announced, most Japanese bond yields rose. As of press release, the 10-year Japanese bond yield reached 0.93%, and the 20-year Japanese bond yield reached 1.69%.
Gradually exit the era of negative interest rates?
Although this adjustment may reduce the need for the Bank of Japan to increase bond purchases, it mayConsolidate market expectations that the Bank of Japan will end YCC and negative interest rates in the short term.
Furthermore, the nine-member committee also raised its forecast of the country's price situation. It is expected that the inflation rate for this year and next two years will far exceed the target of 2%. This has also made more and more people believe thatThe conditions for the Bank of Japan to gradually withdraw from ultra-loose monetary policy are being formed.
The September data showed that the local inflation rate was higher than the Bank of Japan's target of 2% for the 18th month in a row. The Bank of Japan now raised its core CPI forecast for FY2023 from 2.5% to 2.8%, and the core CPI forecasts for FY2024 and FY2025 to 2.8% and 1.7%, respectively (previous forecasts were 1.9% and 1.6%, respectively).
In fact, the market has long been “predicting” the Bank of Japan's move to raise the upper limit of yield. According to the data,The yield on 10-year Japanese treasury bonds rose to a 10-year high of 0.955% a few hours before the central bank's decision was introduced on Tuesday.
Despite repeated assurances from central bank governor Kazuo Ueda that interest rates will remain extremely low, the market already anticipates a policy shift early next year.
Nearly two-thirds of economists surveyed by Reuters expect the Bank of Japan to end negative interest rates next year. The latest YCC policy adjustments confirm the expectations of most market participants.
Editor/Corrine