MNI BOJ WATCH: YCC Options On Table Amid Market Pressure

The Bank of Japan’s meeting this week could consider options including promising more unlimited purchases of bonds or reducing the maturity of its yield curve control framework as markets continue to probe its commitment to ultra-easy monetary policy, MNI understands.

While the BOJ is determined to keep its overnight policy rate at -0.1%, investors continue to push the yield on 10-year Japanese government bonds just above 0.5%, the upper limit of its yield curve control tolerance band. Options to address this market pressure could include announcing fixed-rate purchases along the whole curve, boosting the scale of monthly buying, possibly to JPY30 trillion, or increasing unlimited purchase operations that currently target the 5-10-year sector.

Another possibility would be to lower the maturity targeted in the yield curve framework from 10 years to 5 years. This area of the curve would give a more direct impact on economic activity and bank lending rates, while the BOJ would continue to buy 10-year JGBs to dampen rates, albeit without a fixed target. (MNI POLICY: BOJ Eyes Maturities As Yield Pressure Persists)

Bank officials are likely to prepare several policy options for the board to discuss, leaving a final decision to the governor, who will be guided by an examination of risks from any additional policy action, including the impact on the yen.

BOND BUYING OPTIONS

A less likely move would be for the BOJ to again widen the tolerance range around its targeted 10-year yield of 0%, after shocking investors by doubling it from +/- 25 basis points in December.

The most extreme option, albeit unlikely at this meeting, is to drop yield curve control altogether -- but pledge to buy all JGBs necessary in order to stabilise bond yields.

Bank officials would prefer to hold off from acting in January, and to allow the December move more than a month to bed in, but they realise that this may be impossible given market pressures, which continue to mount amid speculation of a possible retreat from easy policy following the end of Governor Haruhiko Kuroda’s term in April.

Reflationist board members, such as Deputy Governor Masazumi Wakatabe and Asahi Noguchi, could oppose any move this week, but staff could argue that action would boost overall quantitative and qualitative easing.