BOJ makes yield control policy more flexible, waters down rate cap

The Bank of Japan on Friday made its yield curve control policy more flexible and watered down its commitment to defend a cap on long-term interest rates, nodding to growing signs of creeping inflation and the side-effects of prolonged easing.

At the two-day policy meeting that ended on Friday, the central bank kept unchanged its short-term interest rate target at -0.1% and that for the 10-year government bond yield around 0%.

It also maintained guidance allowing the 10-year yield to move 0.5% around the 0% target, but said those would now be “references” rather than “rigid limits”.

The BOJ said it would offer to buy 10-year Japanese government bonds (JGB) at 1.0% in fixed-rate operations, instead of the previous rate of 0.5%, signalling that it would now tolerate a rise in the 10-year yield to as much as 1.0%.

“Sustainable and stable achievement of 2% inflation target, accompanied by wage increases, has not yet come into sight,” the BOJ said in a statement announcing the decision, adding that the bank must patiently maintain ultra-loose policy.

“Taking into account extremely high uncertainty on the economic and price outlook, it is appropriate to enhance the sustainability of monetary easing under the current framework by conducting yield curve control with greater flexibility and nimbly responding to upside and downside risks,” it said.

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