BOJ modifies bond yield control, re-defines long-term rate cap

TOKYO: The Bank of Japan further loosened its grip on long-term interest rates by tweaking its bond yield control policy on Tuesday, taking another small step towards ending its massive stimulus programme.

The nine-member board also revised up its price forecasts to project inflation well exceeding its 2% target this year and 2024, underscoring a growing conviction that conditions for phasing out ultra-loose monetary policy are falling into place.

As widely expected, the BOJ maintained its -0.1% target for short-term interest rates and that for the 10-year government bond yield around 0% set under yield curve control (YCC).

But the BOJ re-defined 1.0% as a loose “upper bound” rather than a rigid cap and removed a pledge to defend the level with offers to buy unlimited amount of bonds.

“Given extremely high uncertainties over the economy and markets, it’s appropriate to increase flexibility in the conduct of yield curve control,” the BOJ said in a statement announcing the decision.

The decision highlights how rising global bond yields and persistent inflation are making it increasingly difficult for the BOJ to maintain its controversial bond yield control.

Under criticism that its heavy defence of the cap is causing market distortions and an unwelcome yen fall, the BOJ raised its de-facto ceiling for the yield to 1.0% from 0.5% in July.

Since then, rising global bond yields have put the BOJ in a tight spot with the 10-year JGB yield rising to a fresh decade high of 0.955% hours before Tuesday’s decision.

While the tweak could reduce the need for the BOJ to ramp up bond buying, it may cement market expectations of a near-term end to YCC and negative interest rates.

Markets are focusing on Governor Kazuo Ueda’s post-meeting news conference for clues on how soon the bank could move towards a full-fledged exit from easy monetary policy.

Inflation stayed above the BOJ’s 2% target for the 18th straight month in September. Surveys have shown heightening inflation expectations, which lower the real cost of borrowing.

But the BOJ has remained a dovish outlier among global central banks that have mostly hiked rates aggressively in recent years to combat rampant inflation, haunted by a legacy of premature tightening that had drawn criticism from politicians for delaying an exit from chronic deflation.

Despite repeated assurances by Ueda that ultra-low interest rates will stay, markets are already predicting a policy shift early next year.

Nearly two-thirds of economists polled by Reuters expect the BOJ to end negative rates next year. – Reuters