Bank of Japan tweaks yield policy

The Bank of Japan announced a tweak to its yield curve control on Tuesday, saying it would allow yields on the 10-year government bond to rise above 1%.

The BoJ left short- and long-term policy rates unchanged at -0.1% and around 0% respectively. However, it said the 1% upper bound of the 10-year Japanese Government Bond (JGB) would now be regarded as a "reference".

The move was approved 8-1 by the board, with only Toyoaki Nakamura dissenting.

Explaining its decision, the Bank highlighted "extremely high uncertainties" over economies and financial markets both at home and abroad. As a result, it deemed it appropriate to increase the flexibility in the yield curve control policy.

"Amid rising global yields and speculation for further policy normalization by the BoJ, 10-year yields had quickly approached the ceiling," Oxford Economics said. "The tweak will allow the BoJ to maintain the smooth functioning of bond markets by avoiding excessive market intervention to defend the ceiling while mitigating yen weakening pressures until global yields start to level off."

ING said: "While it's true that the BoJ tweaked the wording from the upper ceiling to the reference, 1% is still 1%.

"However, in our view, ending the daily bond purchase program is a major step taken by the Bank of Japan today. It means that it won't explicitly fix the rate any more and will let the market decide. The BoJ can now allow the JGB 10Y yield above the reference, but certainly will not let it get too far."