The Bank of Japan's policy shift through 3 key lenses

On Tuesday, the Bank of Japan (BoJ) announced a change to its yield curve control (YCC) policy, allowing the Japanese 10-year government bond to trade up to 50bps above or below its 0% target, versus 25 bps previously.

This article analyses the BoJ’s decision through three key lenses: the yield curve; the yen; and inflation.

The yield curve

In announcing its decision, the BoJ outlined that it intends to promote a smoother formation of its entire yield curve, with the BoJ stating that the relative relationships amongst bonds of different maturities had deteriorated.

With the 10-year bond under YCC, it stuck out significantly from its surrounding maturities. The 10-year yield was trading below the 8- and 9-year bonds, whilst longer-dated bonds had MUCH higher yields, with the yield curve seeing an extreme steepening post the 10-year bond. This indicated that the BoJ’s 25bp cap on the 10-year bond was SIGNIFICANTLY out of step with where it would be priced in the absence of YCC.

Figure 1: Ja…