The BOJ Shift: Managing the Yield Curve

Source: The Financialist

The Bank of Japan didn’t cut interest rates or expand quantitative easing at its September 21 meeting, but it did surprise markets with a brand-new 0 percent target for 10-year Japanese government bond yields. Ten-year bonds have been trading well below zero since January 29, when the bank introduced negative policy interest rates. Negative rates flattened the yield curve, making life difficult for Japanese banks, and the purpose of the target is to steepen it again. Economists on Credit Suisse’s Global Markets team say that central bankers seem to recognize that expanding QE may be impossible at some point, there won’t be enough Japanese government bonds to purchase from commercial banks, which need government debt to meet capital and risk requirements. The BOJ also tried to give inflation expectations a shot in the arm by pledging to continue printing money until inflation exceeds the target rate of 2 percent. Will it work? Credit Suisse’s economists are doubtful, and actually expect inflation expectations to soften further as actual inflation rates fall deep into deflationary territory. To fight deflation, say the economists, the central bank would have been better off either pledging to buy a certain percentage of outstanding government bonds while also increasing the inflation target, or committing to an extended period of long-term public debt monetization.

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