BOJ Allows Long-Term Interest Rates Above 0.5%...Effectively a Rate Hike

YCC Policy Revision Also Strengthens Yen Value

The Bank of Japan (BOJ) decided on the 28th to modify its Yield Curve Control (YCC) policy, which artificially adjusts the fluctuation range of long-term interest rates. Unlike before, when the BOJ would purchase government bonds if the interest rate exceeded the upper limit of 0.5%, it now plans to operate the policy flexibly according to market conditions. The market has effectively interpreted this move as an interest rate hike.

After concluding its monetary policy meeting on the same day, the BOJ announced that it would tolerate the 10-year government bond yield exceeding the allowable fluctuation range of 0.5% to some extent depending on market conditions. However, the short-term interest rate will remain fixed at -0.1% as before. The BOJ also intends to continue purchasing index-linked exchange-traded funds (ETFs) to increase the money supply in the market.

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

Since 2016, the BOJ has set a target for the 10-year government bond yield, a long-term interest rate indicator, and has implemented the YCC policy by purchasing unlimited government bonds when the yield exceeded the target to prevent further increases. This aims to supply liquidity to the market and stimulate the economy. In December last year, the BOJ raised the allowable fluctuation range from ±0.25% to ±0.5%.

The BOJ plans to maintain the current allowable fluctuation range. However, unlike before, when it would immediately purchase government bonds to lower the yield once it exceeded 0.5%, it now plans to tolerate some excess depending on market conditions. Instead, if the long-term interest rate exceeds 1%, the BOJ will resume purchasing government bonds at that point. The market interpreted this policy as effectively expanding the upper limit of long-term interest rate fluctuations to 1%.

The BOJ appears to have decided to modify the policy to adjust the already large scale of government bond holdings. Currently, the BOJ’s share of government bond holdings exceeds 50%, reaching a record high. This is the result of economic policy management where the central bank fills the fiscal deficit expanded by the Japanese government’s ‘money printing.’ Moreover, as the YCC policy has intensified distortions in the bond market, the need to operate the policy flexibly has increased.

Following the BOJ’s modification of the YCC policy, the yen strengthened. As of 3:37 p.m. in the Tokyo foreign exchange market on the same day, the yen was trading at 139.69 yen per dollar. The yen-dollar exchange rate, which had surpassed the 140 yen level in July, fell back to the 130 yen range the previous day, marking a shift to a yen appreciation phase.

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