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

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.