The Bank of Japan faces a stiff challenge to prove that its yield-curve control policy remains in place should it allow 10-year yields to rise above the current cap of 0.5%.
(Bloomberg) — The Bank of Japan faces a stiff challenge to prove that its yield-curve control policy remains in place should it allow 10-year yields to rise above the current cap of 0.5%.
By loosening the limits around the yield curve, the central bank will fuel a surge of speculation on the demise of the framework itself. Outgoing Reserve Bank of Australia Governor Philip Lowe knows all about the reputation damage of the collapse of his yield curve control policy.
The central bank currently offers to buy 10-year sovereign debt at a fixed rate of 0.5% — the ceiling on yields at the moment — on a daily basis. The implication of the Nikkei story is that the it will drop this. Such a move risks turning a drip of speculation into a flood.
To keep market players on guard, the BOJ may act early to rein in the first sharp moves in bond yields above the loosened ceiling.
Among the options available to the BOJ would be a pledge to conduct fixed-rate operations on a flexible basis, thereby keeping bond traders on watch, especially if moves are getting large.
Another possibility would be to promise buying operations on a daily basis but without specifying that the fixed-rate will always be 0.5%. Yet another choice would be to commit to buying bonds flexibly to rein in any sharp or speculative moves.
Whichever options Governor Kazuo Ueda chooses, it’s significantly raised the stakes for his press conference this later today.
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