February 24, 2017, 2:49 am
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BOJ’s market experiments souring

TOKYO- Japan’s attempts to revive anemic consumer spending through unconventional monetary policy have created new problems for the central bank in its daily dealings with financial markets, as rising global yields muddle its efforts to manage local rates.

Introduced in September last year, the Bank of Japan’s (BOJ) Yield Curve Control (YCC) program - the latest in a long series of controversial central bank moves - was designed to keep shorter-dated bond yields lower while allowing longer-dated yields to rise, in theory, making lending more profitable for banks.

The BOJ has put the job of controlling yields in the hands of a small group of relatively junior bureaucrats, who have no say on monetary policy but execute the board’s orders through daily transactions in the interest rate markets.

However, the sometimes contradictory market operations directives are sowing confusion over the BOJ’s intentions, creating tensions between the central bank and the market and underscoring the challenges of its unprecedented policy.

“What’s clear is that market players don’t hold trust in the BOJ,” said Mari Iwashita, chief market economist at SMBC Friend Securities. “If there was trust, things wouldn’t be this messy.”

Bond prices whipsawed this year after the BOJ made several abrupt changes in its market operations as it struggled to keep global yield rises, driven by hopes for U.S. President Donald Trump’s economic growth policies, from pushing Japanese long-term rates up too steeply.

“It’s true, controlling long-term rates is an unprecedented policy,” BOJ Deputy Governor Hiroshi Nakaso told reporters last week, acknowledging that the bank was still learning how best to communicate its intentions to markets. However, he believes the BOJ has the necessary “skill and tools” to control yields. - Reuters
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