Inflation pick-up could soon open the door to BoJ policy fine-tuning. Yield Curve Control ‘face-lift’ possible in 2018 as the macro mix improves. With the 10yr breakeven inflation rate recently climbing above the downtrend in place since mid-2014, the market may be sniffing a sea change.
To be sure, there is still a long way to go until the 2% target is in sight and the Bank can declare success in dispelling the private sector’s deflationary mindset. So the current policy framework can be expected to remain in force as far as the eye can see. But this does not preclude some policy fine-tuning to match the evolving domestic macro backdrop. Over the coming quarters, the BoJ may be in a position to upgrade its assessment of the risks to its inflation outlook from ‘skewed to the downside’ to ‘balanced’, paving the way for a reconfiguration of monetary settings.
Looking ahead, tweaking the parameters of Yield Curve Control (YCC) – for example, by raising the 10yr target and/or widening the band around it – in response to sustained improvement in the growth/inflation mix could make sense.
BoJ announced a widening of the band around their 10y target rate on 31 July 2018. Following this policy adjustment 10y JGB yields rose from 0.05 to 0.15 in October 2018.