In a recent speech, Bank of Japan (BoJ) governor Ueda Kazuo provided an overview of monetary policy and Japan’s economy.
He said that in order to patiently continue with monetary easing under the framework of yield curve control, it is necessary to strike a balance between the economic stimulus effects stemming from strictly keeping long-term interest rates at low levels and the resulting side effects.
Based on this thinking, the BoJ decided to modify the conduct of yield curve control at its last monetary policy meeting. Specifically, while the central bank maintained the target level of 10-year Japanese government bond (JGB) yields at around zero percent, it decided to conduct yield curve control with the upper bound of 1.0% for these yields as a reference and to control the yields mainly through large-scale JGB purchases and nimble market operations. Operations through which it offered to purchase an unlimited amount of 10-year JGBs at 1.0% every business day were ceased.
These decisions were made because, with extremely high uncertainties surrounding economies and financial markets at home and abroad, the BoJ judged it appropriate to increase the flexibility in the conduct of yield curve control, so that long-term interest rates will be formed smoothly in financial markets in response to future developments.
In a phase where upward pressure is exerted on interest rates, strictly capping long-term interest rates could affect the functioning of bond markets and the volatility in other financial markets. The modification of the conduct of yield curve control is likely to contribute to mitigating such side effects. Even in this modified conduct of yield curve control, the BoJ will continue with large-scale JGB purchases and, in a phase of rising interest rates, will keep making nimble responses through market operations depending on factors such as the levels and the pace of change in long-term interest rates.
Therefore, the BoJ deems that 10-year JGB yields are unlikely to be significantly above 1% even if upward pressure is exerted on them. Although long-term interest rates could rise somewhat, real interest rates, which are adjusted by inflation expectations, are important in capturing the effects of monetary policy on economic activity and prices.
“As I explained earlier, since last year, inflation expectations have risen moderately and, despite an increase in long-term interest rates, real interest rates have continued to be negative. As real interest rates are likely to remain so, sufficiently accommodative financial conditions are expected to be maintained,” he said.