Bank of Japan ends the era of negative interest rate and yield curve control

In Short

One month earlier than we had expected, the BoJ scrapped today its NIRP and YCC in a single move, together with ending purchases of ETFs, J-Reits and the announcement to reduce buying of CP and corporate bonds (to be discontinued in about one year). However, the bank will continue with the core of its policy unabated, i.e., government bond purchases with broadly the same amount as before (around JPY 6 tr per month) while it secured its freedom to act, in case of a rapid rise in long-term interest rates. It will also continue its “funding for lending” programme. So far, we interpret the BoJ’s decision to be in line with our outlook,.

Highlights:

  • The Bank of Japan has ended today its Negative Interest Policy (NIRP) as well as its Yield Curve Control (YCC) policy in a single move, one month earlier than we had expected. It will target the uncollateralized overnight call rate between 0% to 0.1 %. The bank also scrapped purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) and announced to gradually reduce the amount of purchases of CP and corporate bonds. 
  • However, the core of its buying policy remained in place. The BoJ will continue JGB purchases with broadly the same amount as before at around JPY 6 tr per month. It also clarified that in case of a rapid rise in long-term interest rates, it stands ready to intervene, regardless of monthly schedules.
  • The BoJ sees an increased likelihood that its 2% inflation target can be achieved in a stable manner. While we agree with the outlook on higher inflation, we are skeptical that this will result in more material tightening any time soon. Especially, we see no key rate hike this year. Markets seem to agree as the Yen depreciated slightly against the US-dollar and 10y JGB yield even receded a bit. The Topix was up about 1%.

 

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Bank of Japan ends the era of negative interest rate and yield curve control
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