Analysis-BOJ's yield curve control in danger as policy backfires
In This Article:
By Leika Kihara
TOKYO (Reuters) - The Bank of Japan (BOJ) is under pressure to change its interest rate policy as soon as Wednesday, after the central bank's attempt to buy itself breathing room backfired, emboldening bond investors to test its resolve.
Unlike other central banks that have been aggressively raising rates to battle inflation, the BOJ continues its decades-long attempt to stoke price rises in the world's third-biggest economy, even as inflation has exceeded the bank's target.
With investors pushing up Japanese government bond yields, testing the BOJ's policy of yield curve control (YCC), the central bank last month shocked markets by raising its cap on the 10-year yield to 0.5% from 0.25%, doubling the band it would permit above or below its target of zero.
"If bond market function continues to deteriorate ahead of the BOJ's policy meeting, the risk of an early end to YCC could heighten," said veteran BOJ watcher Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
Policymakers had hoped December's sudden tweak would extend the lifespan of the BOJ's attempt to control interest rates along the curve, until they could gauge whether recent wage rises would take hold nationwide and Governor Haruhiko Kuroda's successor takes over in April.
The BOJ, they hoped, could then strategise an orderly unwinding of YCC under a new leader, pulling the trigger only when wages were rising enough to keep inflation sustainably around the bank's 2% target, according to five sources familiar with the bank's thinking.
Instead, the BOJ's tweak opened a flood of expectations that a major change was imminent. Less than a month later, bond sellers broke the 0.5% yield cap on Friday, forcing the BOJ into emergency bond-buying to bring the rate back down.
In a sign of its resolve to defend the yield cap, the BOJ on Monday announced plans to conduct additional, emergency bond-buying.
BOJ IN A BIND
"Wages are still low in Japan. Policy normalisation is hardly a done deal," one source said at the start of the year, a view echoed by two others.
Policymakers' thinking just before the two-day meeting from Tuesday was not clear, as they have entered a blackout period on discussing policy.
But it is clear the BOJ's plan is falling apart.
To be sure, with global commodity prices falling, private analysts agree with Kuroda that inflation will slow back toward the BOJ's target later this year. But markets likely will not buy Kuroda's assurances that rates will remain low, after he blindsided them with the December decision, analysts say.