The BoJ was forced into action on Friday as yields on 10-year JGBs spiked. An “unlimited” purchase offer pushed yields lower after a disappointing Rinban. The central bank has not covered itself in glory, but it has revealed the strength of its hand.
The use of fixed rate operations will, of course, come under criticism: the BoJ may be obliged to buy too many bonds. It is worth reiterating that bond purchases will be lower if yield curve control (YCC) is credible.
A strong message has been sent. Time will tell if Friday’s actions have cost them in terms of credibility. In the short run, the central bank may have to work a bit harder to keep yields down if the economic data continues to improve. That said, the strength of the domestic data – particularly the sharp rise in new job offers – presents the BoJ with an opportunity. YCC can amplify the economic recovery.
Summary
- Confusion over yield curve control not ideal
- But Friday’s unlimited purchase offer shows BoJ has plenty of ammunition left
- Fixed rate operations are the best way to conduct yield curve control
