Japan's Unlimited Government Bond Purchase Policy Likely to Change: "Considering Allowing Interest Rates Above 0.5%"

Policy Shift Likely with Flexible Response
Amendment Instead of Abolition to Avoid Market Turmoil
Yen Value Turns to Strong Phase

The Bank of Japan (BOJ) is reportedly set to revise its Yield Curve Control (YCC) policy, which artificially adjusts the upper limit of long-term interest rate fluctuations, at the monetary policy meeting on the 28th. Unlike the previous approach of purchasing government bonds when the rate exceeded the upper limit, the BOJ is expected to adopt a more flexible response. As the BOJ is anticipated to implement another monetary tightening measure following the end of last year, the yen has shown strength.

Kazuo Ueda, Governor of the Bank of Japan (BOJ)
Photo by Yonhap News

On the 28th, the Nihon Keizai Shimbun reported that the BOJ is considering allowing some flexibility in the 10-year government bond yield exceeding the permitted fluctuation range of 0.5%, depending on market conditions.

Since 2016, the BOJ has been implementing the YCC policy, purchasing government bonds without limit to keep the 10-year government bond yield, a long-term interest rate indicator, within a certain range. Last December, the BOJ raised the permitted fluctuation range from ±0.25% to ±0.5%.

The BOJ is reportedly planning to maintain the current fluctuation tolerance range. However, unlike before when it immediately purchased government bonds to lower the yield once it exceeded the 0.5% threshold, it will now decide on bond purchases based on market conditions.

The BOJ appears to prefer adjusting the YCC policy partially rather than abolishing it entirely to avoid market disruption. Citing multiple sources, Nihon Keizai stated, "The BOJ consulted major banks earlier this month about how much long-term interest rates might rise if the YCC were abolished or modified," and "major banks expressed concerns that long-term rates could surge sharply if the YCC were removed."

If this policy is implemented, the BOJ is expected to adjust its already significantly expanded government bond holdings. Currently, the BOJ's share of government bond holdings exceeds 50%, marking an all-time high. The economy has been managed by the central bank covering the fiscal deficit expanded by the Japanese government's 'money printing.'

Expectations of changes to the BOJ's YCC policy have strengthened the yen. As of 10:07 AM in the Tokyo foreign exchange market, the yen was trading at 139.29 yen per dollar. After surpassing the 140 yen level in July, the yen exchange rate fell back to the 130 yen range the previous day, signaling a shift to a stronger yen phase.

This content was produced with the assistance of AI translation services.