The Bank of Japan's yield curve control (YCC) is under fierce market attack, as investors test the bank's commitment to capping bond yields with inflation above the BOJ's target.
The BOJ's ultra-easy policy targets some short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero, in an effort to sustainably achieve 2% inflation.Although the market is testing the upside of the BOJ's bond yield target now, when the bank adopted YCC in 2016, it was trying to stop interest rates from falling too low.
The idea was to control the shape of the yield curve to suppress short- to medium-term rates - which affect corporate borrowers - without depressing super-long yields too much and reducing returns for pension funds and life insurers.The BOJ chose a rate regime because it was reaching the limit of quantitative easing, where it bought targeted amounts of bonds to push down yields, hoping to stoke inflation and economic activity.
To address such side-effects, the BOJ said in July 2018 the 10-year yield could move 0.1% above or below zero. In March 2021, the bank widened the band to 0.25% either direction to breathe life back into a market its buying had paralysed.
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