MNI BOJ WATCH: BOJ Relaxes YCC, Sees Limited Rise In Yields

The Bank of Japan on Tuesday relaxed the upper limit of its range for the 10-year bond yield, citing economic uncertainty, but indicated that it does not want to see a surge in interest rates, with Governor Kazuo Ueda insisting that a rise much above 1% is unlikely.

“The BOJ continues to conduct large-scale bond buying and the Bank will conduct fixed-rate bond buying operations if necessary,” Ueda told reporters. “Judging from those conditions, even if the long-term interest rate faces upward pressure, the rate will not rise sharply above 1%.”

Ueda did not specify any upper yield limit that the BOJ would tolerate. In its decision, the BOJ said it was maintaining its yield curve control framework but altered its description of the 1% upper bound, which it now refers to as a reference point for its market operations.

The Bank will continue with government bond purchases to encourage the formation of a consistent yield curve, it said, but noted that “extremely high uncertainties surrounding economies and financial markets at home and abroad” made a more flexible yield curve control framework appropriate.

While some reports had indicated that the BOJ could raise its cap on Tuesday, BOJ officials feared that this could prompt increases in short- and medium-term interest rates, crimping economic activity. Instead it opted to loosen the framework while still indicating that it would act to curb any sudden bond sell-off.

Tuesday’s move to loosen yield curve control followed decisions to raise the yield limit to 50bp in December and to tolerate yields of up to 1% in July.

GREATER FLEXIBILITY

Ueda said that while the weak yen was not a factor in Tuesday’s decision, a more flexible yield curve framework would reduce the negative side effects of easy policy in bond and foreign exchange markets. The BOJ will continue to apply yield curve control and keep its rate on excess reserves at negative levels until its 2% inflation target comes into sight, he said, though he noted that exchange rate shifts could feed through into inflation. (MNI POLICY: Weak Yen Adds To Pressure For Yield Curve Move)

Data released by the central bank after the Tokyo markets closed confirmed there was no forex intervention through Oct 27. Data for the last two trading days will only be available at the end-November.

Asked about the order in which the BOJ would raise rates from negative levels or abandon yield curve control once it is confident of achieving its target, Ueda said that he has still not formed an opinion. The overnight rate was left unchanged at -0.1%.

The governor again emphasised the importance of wages growth, which feeds through to services prices in particular, for achieving the inflation target. While long-term Japanese expectations for wages and prices are shifting, they are still far below the level needed to achieve the 2% target, he said.

The risk that the BOJ could fall behind the curve if inflation jumps, remains low, he said, despite upward revisions to its inflation projections. (See MNI POLICY: BOJ To Avoid Inflation Signal As Wage Data Awaited)

“The upward revision of inflation is mainly based on the pass-through of cost increases,” he said.