TOKYO- The Bank of Japan will face growing pressure at its policy meeting next week to shift further away from its controversial bond yield control, amid rising global bond yields and persistent inflation.
A spike in US Treasury yields has pushed up the 10-year Japanese government bond (JGB) yield near the BOJ’s 1 percent cap set just three months ago, testing the bank’s resolve to prevent an excessive market-driven surge in borrowing costs.
Whether the central bank will further relax its grip on long-term interest rates will largely depend on how markets move leading up to the Oct. 30-31 meeting, sources have told Reuters.
However, regardless of next week’s decision, the BOJ has its eyes set on a near-term end to negative interest rates and is laying the groundwork for an eventual exit, said Yasuhide Yajima, chief economist at NLI Research Institute.
“Stocks are weakening now, so the BOJ might hold fire next week. But if markets stabilize, there’s a chance of action as early as December,” he said.
At next week’s meeting, the BOJ is widely expected to keep its short-term rate target at -0.1 percent and that for the 10-year JGB yield around 0 percent set under its yield curve control (YCC) policy.
But the board may discuss the fate of the 1 percent ceiling set for the 10-year yield, as leaving it unchanged could force it to ramp up bond buying and expand its already huge balance sheet, analysts say.
Various factors complicate the timing of an exit for the BOJ, which remains a dovish outlier among global central banks that have mostly hiked rates aggressively to combat soaring inflation.
Inflation has stayed above the BOJ’s 2 percent target for the 18th straight month in September. Surveys have shown heightening inflation expectations, which lowers the real cost of borrowing even if nominal rate levels remain unchanged.