Rising Interest Rates Put Pressure on Bank of Japan to Consider Changes in Bond Yield Control
Global Interest Rates Surge
A recent surge in global interest rates is creating challenges for the Bank of Japan (BOJ) and raising questions about potential changes in its bond yield control. The possibility of raising the existing yield cap, which was set just three months ago, is being discussed as a response to the current situation.
Market Movements and Decision Making
The decision to make changes to the yield curve control (YCC) will largely depend on market movements leading up to the upcoming policy meeting on October 30-31. According to three sources familiar with the matter, there is currently no consensus within the central bank on whether an immediate change to YCC is necessary.
BOJ’s Unique Position
The BOJ stands out among major central banks by maintaining ultra-loose monetary stimulus despite other banks rapidly raising interest rates to combat inflation. This policy divergence has put pressure on the yen and contributed to imported inflation.
Rising U.S. Bond Yields
Rising U.S. bond yields are also impacting Japanese counterparts, making it more challenging for the BOJ to keep local interest rates low. The unexpected increase in Japanese long-term interest rates has raised concerns.
Possible Changes to YCC
Given the increasing inflation and market expectations of a gradual phase-out of the BOJ’s massive stimulus, discussions surrounding the fate of YCC are likely to intensify. Potential options include raising the yield ceiling beyond 1.0% or modifying the BOJ’s commitment to defending a set yield level.
Uncertainty and Opposing Views
Uncertainty regarding global growth and next year’s wage expectations has led to opposing views within the BOJ. Some officials are cautious about taking steps that could be interpreted as moving towards an exit from ultra-loose policy.
Implications for the BOJ
The recent spike in U.S. Treasury yields has led to a surge in the 10-year JGB yield, approaching the “precautionary” ceiling of 1% set by Governor Kazuo Ueda. The potential options for this month’s meeting, such as raising the 1% ceiling or removing the allowance band around the 0% target, are emerging within the BOJ.
Feasibility of YCC
While raising the cap would help the BOJ avoid increasing bond buying and drying up market liquidity, it could also push the yield further away from the 0% target, raising doubts about the feasibility of YCC. The BOJ’s pledge to keep ultra-low rates until domestic demand and wages strengthen enough to sustainably reach its inflation target could be compromised.
Market Moves and BOJ’s Response
Some analysts suggest that the BOJ may need to tweak YCC again depending on market moves leading up to the October meeting. However, the BOJ is likely to hold off on ending negative rates or dismantling YCC altogether.
BOJ’s Long-Term Outlook
In fresh quarterly projections due on October 31, the BOJ is expected to upgrade its inflation forecasts. However, Governor Ueda has pledged to maintain ultra-loose policy until solid consumption and wage growth are evident.
Analyst Predictions
In a September Reuters poll, most analysts predicted that the BOJ would abandon YCC by the end of 2024, with a majority projecting an end to negative rates next year.
In conclusion, the recent surge in global interest rates has put pressure on the Bank of Japan to reconsider its bond yield control. The possibility of raising the existing yield cap is being discussed, but there is no consensus within the central bank on whether immediate changes are necessary. The BOJ’s unique stance in maintaining ultra-loose monetary stimulus has weighed on the yen and contributed to imported inflation. Rising U.S. bond yields are further complicating the BOJ’s efforts to keep local interest rates low. Discussions on potential changes to the yield curve control are intensifying, but uncertainty and opposing views within the BOJ are present. The feasibility of YCC and the BOJ’s pledge to sustain ultra-low rates until certain conditions are met are being questioned. Market moves leading up to the October meeting will determine if further adjustments are needed. Analysts have varying predictions on the BOJ’s long-term outlook, with expectations of an eventual shift away from YCC and negative rates.
