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“The Bank of Japan made important changes to its policy framework at its 31 July policy meeting. The biggest was to increase the flexibility of its Yield Curve Control (YCC) policy, by allowing the 10y JGB yield to trade in a wider range,” Bill Diviney, a senior economist at ABN AMRO, notes.

Key quotes

“BoJ governor Kuroda stated that he saw a ‘doubling’ in the trading range from +/-0.1% (i.e. to +/-0.2%), although this was not specified in formal written communications – and we believe it was left deliberately ambiguous. In addition to this, the BoJ added new forward guidance on interest rates, stating that rates would be kept ‘extremely low’ for an ‘extended period’, with explicit reference to the planned consumption tax hike of October 2019 (and the need to assess the potentially negative effects of this) as an anchor point. This sent a very strong signal to markets that further formal changes in policy before 2020 are unlikely.”

“Viewed in isolation, the change to the YCC framework could arguably be viewed as a tightening step for the BoJ. Indeed, while the target for the 10y JGB yield is still ‘around zero’, the cap is now at 0.2%, up from 0.1% previously. However, the move was communicated as making loose policy more sustainable over a longer time frame, coming as it did alongside downgrades to the BoJ’s inflation forecasts. While inflation is moving in the right direction, it will ‘take more time than expected’ for the BoJ to reach its 2% target.”

“The BoJ had come under significant pressure from financial institutions struggling with the combination of negative short rates and an exceptionally flat yield curve. While Governor Kuroda stated that it is not his job to improve the profitability of banks, he did nonetheless point to the risks to market functioning and financial intermediation from BoJ policy. The changes to policy are relatively small, but they should help to alleviate some of the pressures on bank profitability, while also fostering more normal market conditions for Japanese government bonds (liquidity has become scarce, and since the introduction of YCC in 2016, there have even been days when not a single JGB was traded).”