BOJ survey highlights sharp bond market strains from ultra-easy policy

THE Bank of Japan’s massive asset-buying scheme introduced in 2013 led to a sharp deterioration in bond market function, which continued to worsen after the adoption of yield curve control, a central bank survey of market participants showed on Friday (Dec 1).

The findings highlight the strains that the central bank’s prolonged super-loose monetary policy has inflicted on market liquidity in the world’s third-largest economy, and could affect its decision on when to start reversing ultra-low interest rates.

The survey was conducted as part of a comprehensive review the BOJ is conducting on the impact its 25-year unconventional monetary easing steps on the economy and financial markets.

A diffusion index measuring how market participants viewed bond market functioning worsened sharply to 5 after the BOJ’s adoption of quantitative and qualitative easing (QQE) in April 2013, from 62 before its introduction, the survey showed.

The index worsened further to -48 after the introduction of negative interest rates in January 2016, and to -71 after the adoption of yield curve control (YCC), the survey showed.

Former Governor Haruhiko Kuroda deployed QQE in April 2013, aiming to shock the public out of a deflationary mindset with heavy money printing, and fire up inflation to the bank’s 2 per cent target.

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After the huge bond buying began drying up market liquidity, the BOJ pushed short-term interest rates to negative territory in January 2016. It then adopted YCC in September 2016, under which it caps the 10-year bond yield around zero.

With inflation exceeding 2 per cent for more than a year, many market players expect incumbent Governor Kazuo Ueda to dismantle his predecessor’s massive stimulus programme next year. REUTERS