BoJ: Possibility of slightly higher interest rates long-term would be a disastrous for the JPY – Commerzbank

BoJ surprises again. The JPY reaction too suggests that the market does not interpret today’s monetary policy decision as the start of a restrictive process, economists at Commerzbank report.

BoJ introduces greater flexibility around YCC

The BoJ has announced that it will now control its yield curve in a more flexible way. Even though the target for the yield of Japanese government bonds with a 10-year maturity remains 0% and the tolerance range for yield movements around the target also remains at +/-0.5 percentage points, this limit should no longer be seen as a strict boundary but is more flexible. At the same time, there still is a red line as the BoJ will prevent a rise of 10-year yields above 1% with daily purchase operations.

The BoJ can be congratulated because, at first glance, it has managed to allow more movement at the long end of the yield curve, which would of course be a first step towards an exit from YCC, without the market perceiving this as an exit from ultra-expansive monetary policy. However, the BoJ is playing a dangerous game. Such half-baked measures, it is fueling concerns that an actual end to yield curve control may not even be desired or sought irrespective of the development of inflation, possibly also in view of the high level of government debt. 

Even if the Yen for now benefits from the possibility of slightly higher interest rates long-term that would be a disastrous signal for the JPY.