BoJ’s way out of the current impasse: Use a 0% floor rather than a target for JGB yields

Analysts at Natixis expect the BoJ to announce a change in its recently introduced intermediary target as a way to limit the reputational cost for the BoJ of a too frequent, and seemingly erratic, change in targets, would be to reinterpret the 0% as a floor for the 10 year JGB yield rather than a target

Key Quotes

“By introducing the Yield Curve Control (YCC) with the 10 year JGB yield targeted at 0%, the Bank of Japan (BoJ) succeeded to steepen the JGB yield curve, which effectively supported Japanese banks’ profitability.”

“However, as increases in US Treasury yields have been transmitted globally, even to JGBs, the 0% target on 10 year JGB has become more a problem than a solution as it forces the BoJ to purchase more JGBs at a time when it is not really needed. The problem with BoJ “excess” purchases of JGBs is that it puts downward pressure on the Yen, fuelling higher inflation and reducing disposable income as wage growth will not follow suit.”

“To avoid this dilemma, we would expect the BoJ to announce a change in its recently introduced intermediary target. A way to limit the reputational cost for the BoJ of a too frequent, and seemingly erratic, change in targets, would be to reinterpret the 0% as a floor for the 10 year JGB yield rather than a target. This will not only ensure a positive slope on the yield curve supporting bank profitability, but also allow the JGB yield to fluctuate along with global interest rates. Admittedly, the implicit subsidy to the government as debt issuer, will not be as strong but Japanese households’ income will not be squeezed, supporting Japan’s growth.”

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.