TOKYO- A recent surge in global interest rates is heightening pressure on the Bank of Japan to change its bond yield control next week, with a hike to an existing yield cap set just three months ago being discussed as a possibility.
Any decision to change its yield curve control (YCC) will largely depend on how markets move leading up the Oct. 30-31 policy meeting, three sources familiar with the matter told Reuters, speaking on condition of anonymity due to the sensitivity of the matter.
The sources said there is currently no consensus within the central bank on whether an immediate change to YCC is necessary.
The BOJ remains a global outlier having maintained ultra-loose monetary stimulus even as major central banks elsewhere rapidly raised interest rates to fight rampant inflation.
The widening policy gap between Japan and its peers has weighed heavily on the yen, which has in turn fanned imported inflation.
Meanwhile, rising US bond yields are pulling their Japanese counterparts higher, complicating the BOJ’s task of keeping local interest rates low.
“It’s true Japanese long-term interest rates are rising more than expected,” said one of the sources.
“Depending on market developments, it can’t be ruled out,” the source said on the chance of debating further tweaks to YCC this month, a view echoed by two more sources.
As part of efforts to reflate growth and sustainably hit its 2 percent inflation target, the BOJ uses YCC to guide the 10-year Japanese government bond (JGB) yield around 0 percent . In July, it raised the de-facto cap on the yield to 1.0 percent from 0.5 percent to allow long-term rates to rise more reflecting increasing inflation.
However, discussions surrounding the fate of yield curve control (YCC) will likely intensify as rising inflation heightens market expectation of a gradual phase-out of the BOJ’s massive stimulus.
Among ideas that could be discussed would be to raise the ceiling for the 10-year bond yield beyond 1.0 percent , or steps that water down the BOJ’s commitment to defend a set yield level, the sources said.
The BOJ did not reply to a Reuters request for comment.
Given uncertainty over the outlook for global growth and next year’s wage expectations, however, some in the BOJ are opposed to taking steps that would be interpreted as a move toward an exit from ultra-loose policy, the source said.
