BoJ Switches Monetary Policy Framework


The Bank of Japan left the interest rate unchanged at -0.1 percent at its September 2016 meeting but said it would introduce yield curve control to hasten its fight against deflation.

In a comprehensive assesssment of the developments in economic activity and prices under "Quantitative and Qualitative Monetary Easing (QQE)" and "QQE with a Negative Interest Rate", the bank decided to introduce "QQE with Yield Curve Control". The new policy framework consists of two major components: the first is "yield curve control" in which the bank will control short-term and long-term interest rate; and the second is an "inflation-overshooting committment" in which the bank commits itself expanding the monetary base until the year-on-year rate of increase in the observe of consumer price index (CPI) exceeds the prices stabliity target of 2 percent and stays above the target in a stable manner. Specifically, the bank decided upon the following:

1. Yield curve control 
- The short-term policy interest rate: The bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financials institutions at the bank. 
- The Long-term interest rate: The bank will purchase the Japanese government bonds (JGBs) so that the 10-year JGB yield will remain more or less at the current level (around zero percent). With regard to the amount of JGBs to be purchased, the bank will conduct purchase more or less in line with the current pace -- an annual pace of increase in the amount oustanding of its JBG holdings at about 80 JPY  trillion -- aiming to achieve the target level of  a long-term interest rate specified by the guideline. JGBs with a wide range of maturities will continue to be eligible  for purchase, while the guideline for average remaining maturity of the Bank's JGB purchase will be abolished. 
- New tools of market operations for facilitating yield curve control
* Outright purchase of JGBs with yields designated  by the bank -- this will apply for fixed-rate puchase operations. 
* Fixed-rate funds-supplying operations for a periiod of up to 10 year -- by extending the longest maturity of the operation from 1 year currently. 

2. Guideline for asset purchase. 
The bank will buy exchange-traded funds ETF and Japan real estate investment trust (J-REITs) so that their amount outstanding will incrase at annual pace of 6 JPY trillion yen   and about  90 JPY billion yen respectively.  The Bank will maintain their amount oustanding of CP for 2.2 JPY trillion yen and corporate bonds of  3.2 JPY trillion yen. 

3. Inflation-overshooting committment
The bank will continue with QQE with Yield Curve Control, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining the target in a stable manner. 

BoJ Switches Monetary Policy Framework


Bank of Japan l Rida Husna | rida@tradingeconomics.com
9/21/2016 6:23:31 AM