Bank of Japan loosens yield curve control, pledging 'greater flexibility'

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Japan's central bank on Friday loosened its yield curve control, roiling financial markets and underscoring concerns about its protracted monetary easing on financial markets and the real economy. In a policy statement, the Bank of Japan said it will continue to allow 10-year Japanese government bond yields to fluctuate in the range of around plus and minus 0.5 percentage points from its 0% target level — though it will offer to purchase 10-year JGBs at 1% through fixed-rate operations. This move effectively expands its tolerance by a further 50 basis points. The BOJ pledged to "conduct yield curve control with greater flexibility, regarding the upper and lower bounds of the range as references, not as rigid limits, in its market operations," citing the need to remain nimble given "extremely high uncertainties for Japan's economic activity and prices." In what was BOJ Governor Kazuo Ueda's first major policy change since he took the helm in since April this year, the central bank also kept its ultra-loose interest rate intact, electing to hold its short-term interest rate target at -0.1% after its July policy meeting. It also raised its median forecast for inflation to 2.5% for fiscal 2023, up from its 1.8% prediction in April. "In practical terms, this 'flexibility' language is similar to that used in late 2022, when the 10yr JGB target range was increased from +/-25bp to +/-50bp," said Stephen Halmarick, Commonwealth Bank of Australia's chief economist in a note. "The 'flexibility' does represent, therefore, some tightening in monetary policy." Years of accommodative monetary policy in Japan — even as global central banks have tightened policy in the last 12 months — have concentrated carry trades in the Japanese yen. Carry trades involve borrowing at a lower interest rate to invest in other assets that promise higher returns.