July 28, 2023 (MLN): The Bank of Japan (BOJ) maintained its goal of keeping 10-year yields at 0%, but relaxed its 0.5% cap and said it would only be a reference, not a rigid limit.
BOJ decided to conduct yield curve control scheme (YCC) with 'greater flexibility'.
With this move, BOJ is slowly shifting away from decades of massive monetary stimulus on Friday as inflation and economic growth picked up, allowing the country's interest rates to move more freely.
The bank said it will offer to buy 10-year debt at 1% each day, suggesting an effective doubling of the movement range for yields.
The Bank of Japan jolted financial markets by loosening its grip on bond yields in Governor Kazuo Ueda’s first surprise move since taking the helm, a step that will likely spur talk of potential policy normalization to come, Bloomberg reported.
What is YCC?
Under YCC, the BOJ targets short-term interest rates at -0.1% and the 10-year government bond yield around 0%.
It also sets an allowance band of 0.5% above and below the yield target.
For example, the BOJ sets a target for the 10-year bond yield, which is the interest rate that the government pays to borrow money for 10 years.
The BOJ buys or sells bonds in the market to keep the 10-year yield close to its target.
The BOJ’s current target is 0%, which means it wants the government to borrow money for free for 10 years.
The BOJ uses YCC to stimulate the economy and achieve its inflation goal of 2%.
By keeping interest rates low, the BOJ hopes to encourage more spending and investment by households and businesses.
Low interest rates also make the Japanese yen weaker against other currencies, which helps Japanese exporters and boosts inflation.
