Japan's Ueda: "Even with YCC adjustment, 10-year bond yield will not exceed 1%"

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Kazuo Ueda, Governor of the Bank of Japan (BOJ), explained the reason for revising the Yield Curve Control (YCC) policy by stating, "If the long-term interest rate ceiling is strongly set below 1%, side effects could increase."

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

Governor Ueda expressed this view on the revision of the YCC policy during a press conference after the monetary policy meeting on the 31st. On that day, the BOJ decided to maintain the 1% ceiling on the 10-year government bond yield as before, while revising the YCC policy to allow the yield to exceed this level to some extent depending on market trends.

Regarding the background of the policy revision, Governor Ueda said, "We judged that it was appropriate to increase the flexibility of the policy in the process of operating the YCC policy," and added, "We will promptly conduct fixed-rate operations depending on the speed of (interest rate) changes." Fixed-rate operations refer to the BOJ purchasing government bonds unlimitedly at a specified interest rate. This differs from the general bond purchase operations, which buy bonds in order of the highest interest rates without specifying the rate.

On the reason for revising the YCC policy at this point, he explained, "There was a thought that we should act a little earlier than the point when the BOJ buys a large amount of government bonds." This decision appears to have been made out of concern that bond purchases would be necessary as the 10-year government bond yield approached the effective ceiling of 1%, recording 0.890% the previous day.

Furthermore, Governor Ueda firmly stated that, contrary to market expectations, long-term interest rates would not rise significantly even after the YCC revision. He said, "I do not expect long-term interest rates to exceed 1% by a large margin even after the policy revision."

He also indicated that the BOJ is closely monitoring movements in the foreign exchange market. Governor Ueda said, "If movements in the exchange rate significantly change inflation outlooks, it could lead to changes in (monetary) policy."

However, Governor Ueda repeatedly drew a line to prevent the market from interpreting this policy revision as a shift toward tightening. He stated, "The situation where we can predict with sufficient accuracy whether Japan’s inflation will continue to grow in the 2% range, the BOJ’s target, has not yet arrived," suggesting the sustainability of the easing policy. He also said that the BOJ has "not made a decision" on how to abolish the YCC policy and negative interest rates after achieving the inflation target.

Governor Ueda emphasized that the key to achieving the BOJ’s inflation target will be the spring labor-management negotiations scheduled for April next year. He stressed, "The next spring labor-management negotiation is an important point," and highlighted the intention to confirm a virtuous cycle where rising inflation leads to wage increases, which in turn raise service prices.

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