Taking a step back
Before we move on to the factors which shaped the Bank of Japan’s monetary policy stance in December and factors which can impact it going forward, let’s take a step back and see how the earlier QQE (quantitative and qualitative monetary easing) program had impacted Japanese Government Bond yields. This is important because it will help you compare it with the QQE with yield curve control framework which we had outlined in the previous article of this series.
This impact of QQE over Japanese Government Bonds was provided by Bank of Japan chief Haruhiko Kuroda in a presentation post the introduction of QQE with yield curve control. The graph that he presented in support of his explanation is reproduced below.
Declining yields brought forth the new framework
Kuroda noted that yields on Japanese Government Bonds of various tenors have trended down since the introduction of the QQE. The pace of this decline in yields gained momentum with the introduction of negative interest rates.
This impact made the central bank think that if bond buying and negative interest rates can help them control the yield curve, these can be used these maintain the yield curve at a level which is most apt, according to the central bank, for achieving the inflation target of 2%. By controlling the yield curve, the central bank intends to show its determination of getting inflation to its targeted level, and indirectly help inflation expectations rise.
Difference between QQE and QQE with yield curve control
Under the QQE program, the Bank of Japan used to buy Japanese Government Bonds as specified by the amount of increase in outstanding bonds held by it. Given the fixed amount of purchase, the impact on long-term yields varied depending on the state of the economy and financial market conditions.
Under the QQE with yield curve control framework, since the central bank intends to control the yield curve, it will purchase Japanese Government Bonds in the quantum required to achieve its objective.
Kuroda opined that the new framework provides flexibility to the Bank of Japan in bond purchases and will improve the policy’s effectiveness as the bank can tackle a change in circumstances better.
After having seen the impact of QQE and differences between it and the new framework, let’s look at the Bank of Japan’s assessment of the Japanese economy in the next article.