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Japan Banks: Monetary Policy Change Is More Than a Mere Tweak, in Our View

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Japan Post Bank Co Ltd

The Bank of Japan 7182, or the BOJ, has made adjustments to its yield curve control, or YCC, policy by redefining the upper and lower limits of the range within which 10-year Japanese government bonds, or JGB, yields can fluctuate. Instead of rigid limits, these limits are now considered as references. As a result of these changes, Japanese bank stocks may be influenced more by market forces and less by the central bank. This could potentially lead to higher interest rates over time, depending on the level of inflation in Japan, especially service prices and wages, in our opinion. Overall, our view is that the monetary policy has changed today in an important way, but it represents a change of emphasis rather than a complete and abrupt regime shift.

When the BOJ first introduced the YCC policy in September 2016, its aim was to peg the 10-year JGB yield at zero, but it allowed some modest fluctuation of up to 0.10% on each side of zero. In July 2018, this fluctuation allowance was doubled to be between negative 0.20% and positive 0.20%, interpreted as “around zero.” Over time, this range was widened further to 0.25% on each side of zero in March 2021 and then to 0.50% on each side of zero in December 2022.

With the latest announcement, the range remains at negative 0.50% to positive 0.50%, but the BOJ now has more flexibility in its interpretation. This means that if the market demand for 10-year JGBs results in a yield of 0.505% (as seen this morning after an article in the Nikkei newspaper predicting the announcement), the BOJ is no longer bound to purchase as many JGBs as needed to push the yield below 0.50%, unlike the previous approach.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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