BOJ: Ready to Slow JGB Purchases?

G4 central banks are either:  

(1) withdrawing accommodation (Fed and BoE),  

(2) already slowing the pace of further easing, on the way to just remaining extraordinarily accommodative, and still expecting to remain at the zero bound or below for some time (ECB), or  (3) still continuing to ease, with further purchases of government bonds and further expansion of the balance sheet (BOJ). 

This is QE fatigue, a disease that has spread across major central banks! 

The BOJ is still easing in the sense that it is still buying bonds. But the ten-year JGB yield has risen above its  0% target under its “yield curve control” strategy. The YCC strategy is focused on meeting that target by adjusting asset purchases. JGB purchases and the ten-year target are simply two sides of the same coin. If the BOJ were only setting a target for JGB purchases and they began to lower that target, we would immediately say they were moving to a less accommodative stance, whether the ten-year rose or not. It is not purchasing sufficient bonds to resist the rise in the ten-year JGB yield above its target, so it seems to be taking its foot off the pedal.  

The BOJ is perfectly capable of enforcing a JGB yield target at 0%. The BOJ stepping in with a fixed-rate operation at 0.11% was intended to cap the recent rise in JGB yields beyond limits acceptable to the BOJ.  There has been market chatter for some time about when the BOJ would raise the ten-year yield target, and that small rise along with the approaching BOJ meeting could explain some recent turbulence in global bond markets. After all, it could be interpreted as a harbinger of a slightly tighter monetary policy amid growing reservations about the costs of prolonged easing. Small changes in JGB yields will have outsized effects on other DM bond yields (including Treasuries). 

The BOJ does not want to see such a policy action be interpreted as an end to easing–as was the case for  the Fed. The BOJ is merely slowing the pace, which still leaves it extraordinarily accommodative, given that  the policy rate is likely to remain at a low level until there are firm signs of inflation picking up beyond some  threshold. Communication around any changes–even subtle–is of great importance.

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