Bank of Japan to allow ‘greater flexibility’ in controlling bond yields

Tokyo, July 28 (AFP/APP): The Bank of Japan on Friday eased its grip on its ultra-loose monetary policy in a small step towards normalisation as inflation accelerates and the yen comes under pressure against other major currencies.

The central bank has for years embarked on a process known as yield curve control (YCC) where it allows government bonds to move in a narrow band as part of a drive to boost the long-struggling economy.

However, after a closely watched meeting, it said it would allow “greater flexibility” in the market as it hiked its inflation forecast for the current fiscal year.

Still, officials said it did not mean the bank was abandoning its monetary policy — which analysts have warned was looking increasingly unsustainable — saying it would maintain its massive asset-buying measures.

Ten-year JGB yields would be allowed to “fluctuate in the range of around plus and minus 0.5 percentage points from the target level”, the bank said in a statement.

But it will “conduct yield curve control with greater flexibility regarding the upper and lower bounds of the range as references, not as rigid limits”, the bank said.

“The Bank will offer to purchase 10-year JGBs at 1.0 percent every business day through fixed-rate purchase operations,” it added.

Market expectations fluctuated in the lead up to the meeting over whether the bank would tinker with its signature stimulus policies after the two-day meeting chaired by Governor Kazuo Ueda, who took the helm in April.

“Allowing greater flexibility in YCC will help us respond to fluctuation risks more expeditiously, improve the sustainability of monetary loosening and realise the two percent inflation target in a stable and sustainable manner that comes with wage increases,” Ueda told a press conference.

“If the long-term interest rate were to be rigorously capped at 0.5 percent, that could affect the way the bond market functions or bring more volatility in the financial market,” he said.

“We hope that allowing more flexibility in YCC could help ease these concerns.”