MNI POLICY: BOJ Eyes Maturities As Yield Pressure Persists

The Bank of Japan is likely to examine policy options including shortening the maturity of its yield curve controls, which currently target 10-year bonds, as investors continue to push yields to the 0.5% upper limit despite a widening of the tolerated range late last year, MNI understands.

The BOJ, which next meets from Jan. 17-18, would be keen to present any such move as aimed to reduce distortions in financial markets prompted by prolonged easy policy, and to avoid any suggestion that it would represent a reduction of its easing stance. (See MNI POLICY: BOJ To Raise FY23 CPI, Stick With Base 2% View)

But the BOJ feels it cannot rule out policy options to address what it sees as financial market distortions at a time when it still lacks confidence in being able to achieve its 2% inflation target.

In December, the BOJ surprised markets by doubling the tolerated range of its 0% 10-year target yield to +/- 0.5%, prompting investor speculation it was preparing to move away from easy policy, perhaps following the conclusion of Governor Haruhiko Kuroda’s term in April. Kuroda also surprised some BOJ board members by failing to emphasise a continuing commitment to easy policy at the December press conference, though the Bank did underline its promise to defend the new tolerated range by increasing the scale of its purchases to JPY9 trillion from JPY7.3 trillion and stating that it would boost them more if necessary and conduct fixed-rate purchases.

SHORTER MATURITY

One possibility now would be to shift the targeted yield from 10- to three- to five-year bonds, which BOJ analysis indicates are the crucial maturities for maintaining activity and providing stimulus. The BOJ would again promise to buy as many JGBs as necessary to keep yields within the target range.

But there is no prospect for the moment of any increase in the overnight policy interest rate from -0.1%. Nor would there be any further moves towards ending yield curve control, something which the BOJ calculates would immediately push the 10-year yield to around 1% before it stabilises near 0.8% in an environment of weak global growth and slowing inflation.

Some reflationist BOJ board members consider that easing price pressures could even allow a return to the +/- 0.25% tolerated yield band valid until December, but this is view is losing ground and any such move would be an unlikely development as the Bank slowly moves away from super-easy monetary policy.

Higher longer-term JGB yields would be welcomed by commercial banks and investors seeking higher returns, although the accompanying fall in bond prices would immediately bring unrealised losses to financial institutions.