BOJ & YCC Policy

Macro
Central Bank
BOJ
Japan’s comeback from the Lost Decades
Author

Chris Ni

Published

November 1, 2023

YCC Timeline

BOJ YCC Timeline
Date Desc
Sep-2016 YCC first introduced under former governor Haruhiko Kuroda (in offce 2013-2023)
Dec-2022 (1st) 10yr Yields allowed to rise around 0.5%, up from a previous limit of 0.25%
Apr-2023 Ueda’s tenure starts
Jul-2023 (2nd) BOJ would buy 10yr JGB daily at 1%, effectively raising yield cap
Oct-2023 rising UST Yields pulled global rates higher
Oct 31-2023 (3rd) the 1% level is downgraded to only a reference point, breachable threshold

The Tweak also indicate the decision to: stop conducting unlimited bond-purchase operations every day (daily since 2022)

  • no longer show yield levels at which the central bank buys

  • the BOJ will allow moves higher, with a caveat that it may “nimbly” conduct operations to bring the yield back down if needed, BOJ not willing to purchase an unlimited amount” of bonds

Reason of changing Effective Ceiling?

  • inflation in Japan that’s near a 4-decade high

  • BOJ upgraded its inflation projections, saying it now expects a key price gauge to stay well above its 2% target for three consecutive years. The nation hasn’t seen such steady price growth since 1992.

Potential Impact

Domestically?

  • Since Sep 2016 when YCC was introduced, JGB ownership by BOJ dramatically increases; in Oct 2023 BOJ owning over 50% of outstanding JGB

  • Now the market is getting back at least half of its power to determine bond yields

Implications beyond Japan?

  • Due to the low domestic yields, Japanese investors have spent more than $3 trillion offshore searching for higher yields.

  • Even a small shift to Policy Normalization may cause Japanese cash to go back home

  • Japan is the biggest foreign holder of US Treasury (UST), not China, which might be surprising to some people. China is the second largest holder.

  • Japanese funds have highly diversified investments in almost everything, from Brazilian sovereign debt to European power stations and high-risk loans – global impact

A significant shift like abandoning YCC could:

  • strengthen the JPY

  • blow up the bond markets where Japanese investors have significant holdings

  • impact global rates market: such as Australian bonds, the benchmark yields jumped 20 basis points after Ueda’s policy tweak, not to mention French OATs and UST

  • Still, Ueda has emphasized any adjustments would be data dependent, and has been careful to emphasize that real policy normalization is still a ways off, but if wages get another big boost, change may come.