TOKYO -- The Bank of Japan will discuss tweaking its yield curve control policy at a policy board meeting Friday to let long-term interest rates rise beyond its cap of 0.5% by a certain degree, Nikkei has learned, in what would be a shift toward a more flexible policy approach.
Under its yield curve control, the central bank buys large quantities of Japanese government bonds if 10-year yields look likely to go beyond its allowable range of 0.5% below or above zero, resulting in market distortions. The proposed change would keep the rate ceiling, but allow for moderate rises beyond that level.
Since the ceiling was raised from 0.25% last December, 10-year yields have risen to around 0.44%, still below the current cap. But domestic inflation and continued rate hikes by other major central banks like the Federal Reserve and the European Central Bank are fueling concern that yields could climb past the 0.5% threshold.
The BOJ in early July surveyed major banks about how much they would expect long-term rates to increase if yield curve control were adjusted or scrapped, according to sources familiar with the discussions. The banks see 10-year yields as likely to top 0.5% if the policy were dropped, pointing to the risk of a surge in market rates if the central bank abandoned its controls entirely.
Under the more flexible policy being considered, the BOJ would permit gradual increases above the 0.5% threshold, but still clamp down on any sudden spikes. That would allow it to rein in fluctuations driven by speculators.
Concern has been growing in Japan about inflation caused partly by a weak yen, with the currency now hovering above 140 to the dollar. The BOJ's policy of holding down interest rates has led to a widening rate differential with the U.S. and Europe, dragging down the yen. A more flexible version of yield curve control could narrow the gap, easing that downward pressure.
Core inflation, excluding fresh food, has stayed above the BOJ's and government's 2% year-on-year target for over a year, coming in at 3.3% in June. The yen's softness has contributed to this persistent price growth through higher import costs. Some in the government argue that the currency is excessively weak at its current level of over 140 to the dollar.
Even with more flexible yield curve control, the risk would remain that rates could rise more than the BOJ intends, forcing it to step in with big JGB purchases. The central bank would consider the timing of any such moves carefully after gauging the outlook for long-term yields following the policy shift.
The BOJ will disclose policy board members' expectations for economic activity and prices in its quarterly report on Friday. The forecast for core inflation is expected to be in the 2% range, above the figure in the April report.
After Nikkei's initial report, Japan's 10-year government bond yield rose 7 basis points to 0.505% Friday morning, its highest since March 3. The yen also rose to the upper 138 yen level in Tokyo early Friday morning.
