BOJ crafts new weapon to defend yield control policy
THE Bank of Japan (BOJ) on Wednesday (Jan 18) amended rules for a funds-supply market operation, making it usable as a tool for preventing long-term interest rates rising too much.
This came in a show of resolve to maintain the central bank’s yield curve control (YCC) policy for the time being.
Under the amended rules, the central bank can make both fixed-rate and variable-rate loans with terms of up to 10 years against collateral to financial institutions. Before the change, the BOJ was able to offer funds for as long as 10 years only as fixed-rate loans.
Analysts said that by adding variable-rate loans, the central bank can use the funds-supply operation as a tool to control the shape of the yield curve.
The BOJ said it “shall determine the interest rate of each loan in order to encourage the formation of a yield curve that is consistent with the guideline for market operations”. It added that it would take into account “market prices of Japanese government bonds for each maturity”.
After announcing the new rules, the central bank said it would offer five-year loans under the funds-supply operation with a duration between Jan 24, 2023, and Jan 24, 2028.
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The BOJ has struggled to defend a 0.5 per cent cap on the 10-year bond yield set under its YCC policy. Investors have sold bonds in anticipation of a tweak to its ultra-loose monetary policy.
The latest rule changes were announced in tandem with the central bank’s decision on Wednesday to make no changes to the YCC policy, including the yield cap.
Takafumi Yamawaki, head of Japan rates research at JP Morgan Securities, said the amendment would allow the BOJ to offer five-year loans with the funds-supply operation, a move that would help push down five-year swap rates.
“This was probably governor Haruhiko Kuroda’s way of ensuring his successor won’t have to deal with deteriorating market function from the outset,” he said.
“It doesn’t mean the BOJ won’t need to tweak YCC, which is showing some limits. But any tweak can be done by the new governor after scrutinising economic conditions.” REUTERS
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