BoJ’s way out of the current impasse: Use a 0% floor rather than a target for JGB yields - Natixis


Analysts at Natixis expect the BoJ to announce a change in its recently introduced intermediary target as a way to limit the reputational cost for the BoJ of a too frequent, and seemingly erratic, change in targets, would be to reinterpret the 0% as a floor for the 10 year JGB yield rather than a target

Key Quotes

“By introducing the Yield Curve Control (YCC) with the 10 year JGB yield targeted at 0%, the Bank of Japan (BoJ) succeeded to steepen the JGB yield curve, which effectively supported Japanese banks’ profitability.”

“However, as increases in US Treasury yields have been transmitted globally, even to JGBs,  the 0% target on 10 year JGB has become more a problem than a solution as it forces the BoJ to purchase more JGBs at a time when it is not really needed. The problem with BoJ “excess” purchases of JGBs is that it puts downward pressure on the Yen, fuelling higher inflation and reducing disposable income as wage growth will not follow suit.”

“To avoid this dilemma, we would expect the BoJ to announce a change in its recently introduced intermediary target. A way to limit the reputational cost for the BoJ of a too frequent, and seemingly erratic, change in targets, would be to reinterpret the 0% as a floor for the 10 year JGB yield rather than a target. This will not only ensure a positive slope on the yield curve supporting bank profitability, but also allow the JGB yield to fluctuate along with global interest rates. Admittedly, the implicit subsidy to the government as debt issuer, will not be as strong but Japanese households’ income will not be squeezed, supporting Japan’s growth.”

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