The Bank of Japan this week crafted a new weapon to defend its yield cap and extend the lifespan of its yield control policy, without having to ramp up bond buying and dry up already thinning market liquidity.
for an existing market operation tool, so it can pump funds extending up to 10 years in variable rates to financial institutions against collateral.
The BOJ raised the cap to 0.5% from 0.25% last month in a bid to iron out market distortions caused by its huge bond buying. But the move backfired as markets attacked the newly set ceiling on expectations the BOJ could raise the cap again - or abandon YCC altogether. The announcement reflects the BOJ's resolve to sustain YCC by complementing its bond-buying operation with a remodeled funds-supplying operation. It is unusual for central banks to use funds-supplying operation, typically focused on guiding short-term interest rates, to influence long-term rates.
It would also effectively serve as a subsidy to financial institutions that can tap the facility, potentially putting its neutrality on the line.
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