Bank of Japan to control the Japanese yield curve!!

One is completely fed up of the tactics being deployed by central bankers worldwide to keep controlling and planning the financial economy. I did read news of yield curve control by Bank of Japan here and there in the morning, But somehow thought it must be some rumor or one of those crazy suggestions to keep hings going.

But it is true. Bank of Japan indeed is going to control the yield curve!:

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan conducted a comprehensive assessment of the developments in economic activity and prices under “Quantitative and Qualitative Monetary Easing (QQE)” and “QQE with a Negative Interest Rate” as well as their policy effects, and compiled “The Bank’s View” as provided in Attachment 1. The Policy Board’s view on the current situation of and outlook for economic activity and prices is provided in Attachment 2. 2.

Based on these, with a view to achieving the price stability target of 2 percent at the earliest possible time, the Bank decided to introduce “QQE with Yield Curve Control” by strengthening the two previous policy frameworks mentioned above. The new policy framework consists of two major components: the first is “yield curve control” in which the Bank will control short-term and long-term interest rates; and the second is an “inflation-overshooting commitment” in which the Bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI) exceeds the price stability target of 2 percent and stays above the target in a stable manner. 

Wow! Had to read that couple of times as thought it was a joke.

How do they plan to control yields? Well keep buying more govt securities at rates fixed by the central bank!

(1) Yield curve control

The short-term policy interest rate: The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

The long-term interest rate: The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent). With regard to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline. JGBs with a wide range of maturities will continue to be eligible for purchase, while the guideline for average remaining maturity of the Bank’s JGB purchases will be abolished.

New tools of market operations for facilitating yield curve control (by an 8-1 majority vote)[Note 2] The Bank decided to introduce the following new tools of market operations so as to control the yield curve smoothly. (i) Outright purchases of JGBs with yields designated by the Bank (fixed-rate purchase operations) (ii) Fixed-rate funds-supplying operations for a period of up to 10 years (extending the longest maturity of the operation from 1 year at present)

Central planning at its best really. All these actions are actually getting the real central bank out of the central bank. One is not even discussing inflation overshoot here as first it has to get some inflation before it can look at overshoot.

Bernanke who is one of the key people behind central bank can do whatever comments:

The most surprising, and interesting, part of the announcement was the decision to target the ten-year JGB yield. As I noted in a previous piece on targeting longer-term rates, there is a U.S. precedent for the BOJ’s new strategy: The Federal Reserve targeted long-term yields during and immediately after World War II, in an effort to hold down the costs of war finance.

Targeting a long-term yield is closely related to quantitative easing. In a quantitative easing program, the central bank specifies the quantity of financial assets (such as government bonds) that it plans to buy, leaving the price of those assets (the yield, in the case of bonds) to be set in the market. Pegging a long-term yield, as the BOJ now plans to do, amounts to setting a target price rather than a target quantity. The central bank posts the price at which it stands ready to buy or sell bonds, but the quantity actually purchased depends on how much market participants offer to sell at that price.

In that regard, it was puzzling that the BOJ retained its 80-trillion-yen quantity target for JGB purchases; one of these two targets is redundant. I presume that the BOJ was concerned that dropping the quantity target would lead market participants to infer (incorrectly) that the Bank was scaling back its program of monetary easing. Over time, assuming that the BOJ does adhere to its new rate peg, the redundant quantity target is likely to become softer and to recede in importance. The BOJ’s communication will accordingly begin to emphasize the yield on JGBs, rather than the quantity of bonds in the BOJ’s portfolio, as the better indicator of the degree of monetary policy ease.


It is amazing to see majority of wise members of BoJ MPC agreeing to all these moves. BoJ was made independent in 1997 and did everything suggested by the modern central bank thinkers – inflation target, MPC and so on. It is startling to see none of it really working. It is a reminder to us in India who make noise over such cosmetic changes happening in India with much lag…


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