JAPAN: Yield curve control – the right policy, a positive step for Japan

By 21st September 2016Japan

The Bank of Japan may have started the end of its flirtation with negative interest rates. The overnight rate was originally cut to -0.1% because the BoJ wanted to shift the yield curve down. Mr. Kuroda lauded the benefits in his recent speech at Jackson Hole. By introducing what is effectively a ‘reverse tap’, the BoJ now realises there are more constructive and sustainable policy tools. Monetary policy options have not been exhausted.

Yield curve control is a very positive step. Readers interested in a more detailed argument in favour of this policy are directed towards Appendix 1, taken from The U.S. Economic Recovery (2QT Publishing, 2014), which has been included at the end of this commentary and here

Summary:

  • Policy akin to reverse tap and successful yield targetting of post-war era
  • Credible policy may lead to lower bond purchases: that will reinforce, not undermine stimulus
  • A similar policy in the Eurozone would be less successful, without requisite reforms

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