
YCC Adjustments on the Cards Amid Sticky Inflation and High Yields
Analysts anticipate that the Bank of Japan may make adjustments to its yield curve control (YCC) policy in its upcoming meeting on Tuesday, following recent data that indicated a rise in Japanese inflation. Additionally, increasing bond yields and a weakened yen are adding to the pressure on the central bank.
While it is widely expected that the central bank will maintain its current stance, persistent inflation may prompt a widening of its yield curve control range, which could tighten monetary conditions in an otherwise accommodative environment.
Recent reports from various media outlets have indicated that the Bank of Japan is contemplating such a change, reacting to the heightened pressure from a sell-off in bond markets throughout October. Currently, yields on government bonds, which the BOJ permits to fluctuate within a range of -1% to 1% under its YCC policy, are approaching the upper limits of this band. Last Monday, the 10-year yield reached its highest level in over a decade, hitting 0.89%.
The Bank of Japan has intervened multiple times in the bond markets in October to stabilize rising yields. Analysts from Bank of America suggest that the BOJ could potentially adjust its YCC target range to between -1.5% and 1.5%. Meanwhile, analysts at ING believe the central bank might keep the existing 1% range unchanged but could raise the midpoint target from 0% to either 0.25% or 0.5%.
ING analysts noted that the declining yen is exerting additional pressure on inflation, which could adversely affect consumer spending, and a significant rise in interest rates might hamper business investment. Increasing bond-buying operations could place further burdens on the Bank of Japan.
A revision to the BOJ’s inflation forecasts is anticipated, as core inflation—excluding volatile fresh food prices—has remained above the bank’s 2% target for 18 consecutive months. Changes to the gross domestic product (GDP) outlook are also expected, given the resilience of the Japanese economy this year, which has experienced steady growth in the first two quarters.
Despite these pressures, the Bank of Japan is facing challenges in balancing adequate stimulus for the economy with the depreciation of the yen and rising bond yields, both of which pose potential destabilizing risks for Japan as the world’s third-largest economy.
While analysts foresee a gradual shift away from the BOJ’s ultra-dovish stance in 2024, the central bank has remained largely non-committal about any upcoming changes. Since the introduction of the YCC policy, the BOJ has only made minor adjustments twice—once in July and again in December of the previous year—both in response to significant declines in the yen and soaring bond yields.