Policy Change in Long-term Yields

After two-day Monetary Policy Meeting, the Bank of Japan on Tuesday announced that it loosens its cap at 1.0 percent on long-term yields. While the bank will maintain the target for 10-year Japanese government bond (JGB) yields at around zero percent, there spread a speculation that the policy change was a symbolic step forward toward the exit of current ultra-easy monetary policy. The bank is supposed to closely watch the situation of economy.

BoJ has been setting the rigid cap on long-term yield. When it was reaching the limit, the bank unlimitedly purchased 10-year JGB to maintain the yield. The cap was raised from 0.25 percent to 0.5 percent in December 2022, and from 0.5 percent to 1.0 percent in July. The bank changed the policy again in three months, saying that the bank will conduct yield curve control with the upper bound of 1.0 percent “as a reference.” BoJ is going to stop unlimited purchase of JGB.

 

Why did the bank have to change its policy so soon? “We didn’t expect yields to near 1.0 percent so soon… but they have reached 0.9 percent. The biggest factor is that U.S. Treasury yields have been rising much faster than anticipated,” Governor Kazuo Ueda explained in the press conference on Tuesday. Ueda added that he would not expect long-term yields to rise sharply higher from 1.0 percent.

 

Meanwhile, BoJ released the outlook for economic activity and prices, which forecast that the consumer price index will rise by 2.8 percent in FY 2023 and in FY 2024, and 1.7 percent in FY 2025. Those prospects were raised from those in July.

 

It is supposed that the decision of functionally removing the cap of 1.0 percent was made to avoid further price hike. As seen in current United States monetary policy, raising its long-term yield around 5 percent, the yield gap between US and Japan has been widening. The gap will cause further purchase of US dollar and sell of Japanese yen, making yen cheaper against dollar. Depreciation of yen causes further price hike of imported goods in Japan, pushing whole commodity price up.

 

Ueda told that sustainable and stable accomplishment of 2 percent inflation target has yet achieved, expecting positive circulation of rise of consumer price and wage hike. Japan Trade Union Federation, or Rengo, upholds 5 percent of wage hike in the concentrated labor negotiations next spring, while the president of Japan Business Federation, or Keidanren, referred to 4 percent in September. However, the wage hike has not caught up with price hike so far.

 

Prime Minister Fumio Kishida focuses on economy this fall, saying “It’s economy, economy and economy.” But the rise of long-term yield may have negative impact on household economy, for instance, boost of housing loan interest. It also affects the payment of interest of the huge amount of government debt. The government and BoJ have to make careful announcement about their policies, including exit from extremely low interest policy.