Heard on the Street: As the Fed discusses potential changes to its policy framework, it should look closely at the shortcomings of the Bank of Japan’s “yield curve control.”
Bank of Japan Gov. Haruhiko Kuroda. Photo: kim kyung-hoon/Reuters By Mike Bird Updated June 19, 2019 5:09 am ET
Unlike other major central banks, Japan aims to set a price for 10-year government debt, with yields held around zero by the BOJ. The central bank stands willing to buy and sell the bonds to keep the yields in place. The policy was introduced in 2016, with the aim of keeping policy stimulative while allaying concerns about the profits of financial-services firms, which were hurt by negative long-term bond yields.
All else being equal, that boosts the value of the Japanese yen as returns to Japanese assets become relatively more attractive compared with their international peers. In the past two months, the yen has strengthened by about 3.3%, reaching 108.4 to the greenback. During that period, the Bank of Japan’s trade-weighted yen index has touched its highest level in two and a half years.
A prime example of the problem came on Tuesday, when European Central Bank chief Mario Draghi’s suggestion of an interest-rate cut sent European bond yields plunging, and the euro down against the yen. The BOJ, constrained both by concerns about the profitability of the country’s banks and the rigidity of its yield curve control, is unable to meaningfully react.
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