MNI POLICY: BOJ Looks At Signalling Undisclosed Yield Cap

The Bank of Japan is considering measures to prevent long-term yields from rising sharply after a potential exit from negative interest rates and the removal of the 1% upper limit on 10-year bond yields by as early as the March 18-19 meeting, MNI understands.

The Bank could signal that an upper limit on bond yields will remain in place, without making that limit public, and while it could reduce the scale of scheduled JGB purchases following the meeting, it could also signal that it will continue to buy bonds in a flexible manner as necessary. (See MNI POLICY: Wages Data Support BOJ Exit From Negative Rates)

Such measures should limit speculation on a broader move away from negative policy, which could cause significant losses at commercial banks if yields rise too fast. Some officials at the Bank consider that the conditions now exist for a move away from negative rates, though others still want to wait for more evidence of wage-price inflation.

Even if the BOJ reduces the scale of JGB buying, its stock of holdings is unlikely to fall much, the BOJ calculates. It is also likely to largely maintain current guidelines for its purchase operations, even as it reduces their scale to the lower end of the range.

The BOJ is also likely to signal that it expects only a very gradual increase in overnight rates, in line with the evolution of the economy and prices, as it seeks to keep term premia at low levels.