Former deputy governor of the Bank of Japan (BOJ), Hiroshi Nakaso, has predicted that the central bank may modify or even end its bond yield control (YCC) policy due to its increasing side effects. In an interview with the Nikkei newspaper, Nakaso expressed concerns over the negative impact of the YCC policy on the profits of financial institutions.
According to Nakaso, the massive stimulus program initiated by Haruhiko Kuroda, whose term as governor ended on Saturday, succeeded in ending deflation. However, the program failed to achieve the BOJ’s 2% price goal sustainably due to low inflation expectations. This has resulted in the BOJ having to sustain ultra-loose policy for an extended period, despite rising costs such as the pain on banks and dysfunction caused in the bond market.
“The increasing side-effects are a sign the policy effect (of YCC) is working its way through the economy,” Nakaso said. “When the appropriate timing comes, the BOJ’s new leadership will likely modify or abolish YCC,” or yield curve control.
Challenges Ahead for BOJ
Nakaso believes that the next challenge for the BOJ will be to end negative interest rates and start a full-fledged policy normalization. He further stated that there need to be clear signs that Japan’s output gap is improving and wages would rise sustainably for the BOJ to abandon negative rates.
“The BOJ will make the appropriate decision when it confirms that the momentum for hitting 2% inflation can be sustained,” he said on the expected timing of an end to negative rates.
YCC Policy in Focus
Under YCC, the BOJ guides short-term interest rates at -0.1% and caps the 10-year bond yield around zero in an attempt to sustainably hit 2% inflation. However, markets are rife with speculation that the BOJ may tweak or end YCC under Kazuo Ueda, who became the new governor on Sunday. This is due to inflation exceeding 2% and the central bank’s massive bond buying program drawing criticism for distorting market pricing.
As Japan’s new BOJ governor takes charge, there is increasing speculation over the future of the YCC policy. The concerns raised by Nakaso regarding the policy’s side effects on financial institutions’ profits may add pressure on the BOJ to review or modify the YCC policy. The challenges ahead for the BOJ are clear, and it remains to be seen how the central bank will navigate its path towards policy normalization.
