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Bank of Japan’s ‘yield curve control’ gets mixed reception

Markets also had a positive but unspectacular reaction to the announcement with Japan’s Nikkei 225 closing 1.9% up at 16,807, the FTSE 100 trading up 0.4% at 6858 and the FTSE 250 up 0.6% at 18,009 by mid morning.

The launch of ‘yield curve control’ by the BoJ essentially involves making its asset purchase programme flexible, for example by buying more short-term bonds to ensure the yield curve retains some steepness. 

The central bank also said is was relaxing the target of expanding the monetary base by ¥80 trillion a year, in favour of a flexible total.   

Trevor Greetham, head of multi asset at Royal London Asset Management, said the BoJ’s move represents ‘helicopter money in all but name’ and it is supportive of RLAM’s overweight stance in Japanese equities.

“Japan has been suffering from excessive debt and deflationary pressure for longer than any other developed market, so we should watch new policy developments in Tokyo with interest,” Greetham said. “Today’s announcement makes it clear that the authorities are going down the route of explicit financial repression, boosting nominal growth while keeping interest rates near zero at all maturities. The idea is to transfer wealth from savers to borrowers, the government included, to reduce debt burdens and wipe the slate clean.”

“The BoJ decisions overnight mean that they now believe they have 3 levers to pull: overnight interest rates, the size of the balance sheet and the 10-year yield,” said Mitul Patel, head of interest rates at Henderson Global Investors. “In practice, since they cannot set all 3 variables, there may be trade-offs involved. If for example 10 year yields stayed stable with significantly fewer JGB purchases, this may make it more difficult to meet their balance sheet expansion targets.” The BoJ also passed on the opportunity to take rates more negative at this juncture, though this may yet be revisited at future meetings. The initial market response has seen a weaker yen, stronger Japanese stock markets and higher JGB yields.”

“It is however, tough to see how today’s announcement is anything more than an adjustment to the current programme, and without anything radically new or bold, the BoJ’s 2% inflation target continues to looking aspirational rather than likely,” Patel added.  

Maxime Alimi, senior economist at AXA Investment Managers, sees the changes as only ‘incremental’.

Part of the Bonhill Group.