[Tokyo 20° Reuters]-
In the past, a BOJ governor once said he would overhaul Yield Curve Control (YCC) by surprise. If many market participants sell off Japanese government bonds in anticipation of policy reviews, the demerit will be significant. This is because they lose to market urgings and get involved in central bank bonds, and the sharp rise in interest rates causes a major shock to the market, and speculation success induces further shortages. One could argue that it made sense to make a surprise change at the end of the year when there were fewer attendees.
Some steps have been taken to mitigate the damage caused by the YCC revision, such as increasing the amount of long-term government bond purchases for the upcoming January-March period. However, the decision remains a risky gamble for the BOJ.
It stands to reason that once the market has broken down, it can be pushed for more policy changes. The central bank’s credibility will not recover unless it makes a strong commitment, and as long as the BOJ itself continues to breach its commitments, policies that appeal to market expectations may no longer be effective.
The main policy change going forward is likely to be the abolition of negative interest rates rather than a further review of the YCC. Returning to a positive interest rate before the YCC revision is synonymous with artificial and complete flattening of the Japanese government bond yield curve, so it is persuasive that this decision is ahead of the curve.
The BOJ will therefore aim to suspend purchases of Exchange Traded Funds (ETFs) and J-REITs (real estate investment trusts) and further adjust the YCC under certain conditions of a reasonably strong economic environment and inflation rate. Naturally, the timing for such policy changes will depend heavily on the appointment of the next governor and lieutenant governor. (Tomoko Uetake)
