TOKYO, October 31, 2023 – The Bank of Japan (BOJ) has announced a significant shift in its yield curve control (YCC) policy, marking a change in its approach to managing the country’s economic stability. In a press release, the BOJ revealed that it will allow for greater flexibility within its YCC framework and has altered its language concerning the upper bound of the 10-year Japanese government bond (JGB) yield.
Central Bank’s Stance
The central bank’s new stance on the 10-year JGB yield involves maintaining a target level of 0% while considering the upper bound of 1% as a reference. This decision comes after the Bank of Japan expanded the yield target band by 50 basis points to 1% on both sides back in July. However, the bank now commits to permitting yields to fluctuate within a range of approximately plus and minus 0.5 percentage points from its 0% target level, which was initially established in December of the previous year.
The Bank of Japan board approved this change with an 8-1 vote, with only board member Toyoaki Nakamura expressing dissent. Nakamura supported the idea of increased YCC flexibility but believed it would be more appropriate to enact this after confirming a rise in firms’ earning power through a survey conducted by Japan’s finance ministry.
In addition to the YCC policy adjustments, the Bank of Japan also raised its inflation outlook for the country compared to its July report. The prolonged effects of increased costs, such as rising import prices and recent crude oil price hikes, were cited as the primary reasons behind this adjustment. The core Consumer Price Index (CPI) forecast was increased to 2.8% for fiscal year 2023, up from the previous estimate of 2.5%. Projections for fiscal years 2024 and 2025 were also revised to 2.8% and 1.7%, respectively, up from 1.9% and 1.6% in the prior forecast.
The Bank of Japan acknowledged the presence of “extremely high uncertainties” in both domestic and international economies and financial markets. As a result, the bank deemed it “appropriate” to enhance the flexibility of the YCC policy. This marks a departure from its previous strategy of strictly capping long-term interest rates at 1%, which, although effective, was associated with potential side effects. The BOJ now intends to manage the yield curve primarily through significant JGB purchases and nimble market operations.
Furthermore, the Bank of Japan decided to maintain its short-term policy rate at -0.1%, even as core inflation in the country exceeded the stated 2% target for 18 consecutive months. It’s important to note that the BOJ’s definition of core inflation excludes food prices. Core CPI, which had exceeded 3% in August, decreased to 2.8% in September, marking the first time it fell below the 3% threshold in over a year.
The BOJ’s adjustments to its YCC policy and inflation outlook reflect its commitment to adapt to the evolving economic landscape while ensuring the stability of the Japanese economy amid increasing uncertainties. These decisions are expected to have a profound impact on the country’s financial and monetary policies moving forward.