BoJ's Yield Curve Control Under Scrutiny: Market Tests Commitment to Yield Capping

Yield Spread Widens as Investors Eye BoJ Policy

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The Bank of Japan's (BoJ) yield curve control (YCC) policy has come under intense market pressure as investors question the bank's resolve to maintain its yield cap. The yield on the Japan 10Y Government Bond has risen to 0.882%, and the spread between 10-year and 2-year bonds has widened to 599 basis points. This widening spread indicates that investors expect the BoJ to eventually allow long-term yields to rise, effectively ending its YCC policy.

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The BoJ has long maintained a negative interest rate policy and a hard cap on 10-year yields of 0.25%. This policy has aimed to stimulate economic growth and inflation by keeping borrowing costs ultra-low. However, rising inflation and global interest rate hikes have put pressure on the BoJ to reconsider its stance.

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In December 2022, the BoJ surprised markets by announcing a widening of the yield band for 10-year bonds to +/- 0.5% from +/- 0.25%. This move was seen as a sign that the BoJ was becoming more tolerant of higher yields. However, investors have continued to test the bank's commitment to the new yield cap.

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The market's reaction to the BoJ's adjustment has been muted so far. This may be due to investors' uncertainty about the BoJ's long-term intentions. Analysts believe that investors will continue to challenge the BoJ's resolve until there are clearer signs that the bank is willing to allow yields to rise further.