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​BOJ Shifts Its Easing Strategy to Steepen Yield Curve

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Dan Weil | FlashRatings | Wednesday, September 21, 2016 10:39 AM EDT
The Bank of Japan introduced a radical change in its monetary policy Wednesday, declining to increase its bond purchases and instead deciding to target the 10-year government bond yield.

The BOJ set a goal of zero percent, hoping to end a period of negative yields for the 10-year JGB. That would steepen the yield curve. A flattening of the yield curve is often associated with recession, and a steeper curve would boost the sagging Japanese banking industry.

Global financial markets reacted positively to the news Wednesday, with stocks and commodity prices rising. “It’s a good start to a central-bank heavy day,” Ben Kumar, investment manager at Seven Investment Management in London, told Bloomberg.  

Now markets await Thursday’s finish of the Federal Reserve’s policy meeting. It’s expected to refrain from raising rates.

As for the BOJ, it will adjust its bond buying as necessary to keep the 10-year yield at zero. It also said it will leave short-term rates negative and perhaps cut them further to stimulate the economy. There was concern that the BOJ was running out of bonds to buy. It’s currently purchasing about $780 billion of fixed-income securities a year and owns about one-third of government bonds outstanding.

Not everyone was impressed by the BOJ’s move. “I can’t help myself becoming skeptical whether they can control long-term interest rates, which move on a variety of factors,” Mari Iwashita, chief market economist at SMBC Nikko Friend Securities, told The Wall Street Journal.