Yield Curve Control and Balance Sheet

July 2017
Seiichi SHIMIZU
BANK OF JAPAN
The views presented here are those of the author and do not necessarily reflect those of the Bank of Japan
1. BOJ’s Balance Sheet

Assets Liabilities and Net assets

tril. yen tril. yen

500 500
Others Others

ETF・REIT Banknotes

400 400 Current deposits

CP・Corporate bonds 凡例用
Funds-Supplying Operations
against Pooled Collateral
300 JGB 300

200 200

100 100

0 0
Mar-07 Sep-08 Mar-10 Sep-11 Mar-13 Sep-14 Mar-16 Mar-07 Sep-08 Mar-10 Sep-11 Mar-13 Sep-14 Mar-16

Source: Bank of Japan. 1

2. Balance Sheets of Major Central Banks
(Ratio to nominal GDP)
%
120
Bank of Japan
Federal Reserve System
100 European Central Bank
Bank of England
Swiss National Bank
80

60

40

20

0
Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 Mar-15

Sources: Cabinet Office; Bank of Japan; Federal Reserve; BEA ; ECB; Eurostat; Haver. 2
3. Overview of BOJ’s Monetary Policy
- New Monetary Policy Framework Since September 2016
New framework comprises of Yield Curve Control and Inflation-Overshooting
Commitment.

Yield Curve Control (YCC) Inflation-Overshooting Commitment

% Monetary Base:GDP
% of nominal % of nominal GDP
0.8

Recent shape of 100

JGBJGB
Yield Curve
yield curve
0.6 Future
Japan developments
Target level
Target levelofofaa 80
Short-term
Short-term long-term United States
0.4 policy interest
policy interest long-term
interest rate of
rate "minus
rate of “minus interest rate
“around zero Euro area
"around around
0.1
0.1 percent"
percent” percent” zero 60
Around
80%
percent" 80%
0.2

40
0.0 Around
around
20%
20%

-0.2 20

-0.4 0
CY 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 3
0 1 2 3 4 5 6 7 8 9 10 15 20 30 40
year residual maturity
3
Sources: Bloomberg; Cabinet Office; Bank of Japan; Federal Reserve; BEA ; ECB; Eurostat.
4. Where Are We Now?
- Halfway toward the price stability target of 2%

Output Gap CPI

% %
8 4
All items, less fresh food
6 3 All items, less fresh food and energy

4 2

2 1

0 0

-2 -1

-4 -2

-6 -3

-8 -4
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

Sources: Bank of Japan; Ministry of Internal Affairs and Communications.

Notes: Latest data for Output Gap as at the October-December quarter of 2016. CPI data as at the January-March quarter 4
of 2017.
5. FOMC’s Consideration on Targeting
a Long-Term Treasury Yield (October 2010)
• Benefits
 Possible to work directly on lowering the long-term rate.
 An announcement of a target that clarifies perceptions could
prompt the rate to move down without purchasing securities in
significant quantity.
• Remarks or drawbacks
 Adjustments in the cap would likely be needed.
 Substantial volatility in central bank securities holdings.
 Complications for exit from targeting approaches.

Source: Board of Governors of the Federal Reserve System, “Strategies for Targeting Interest Rates Out the Yield Curve,”
background document for the October 15 2010 FOMC Meeting, 2010.

5
6. How Different is YCC from Previous
Unconventional Measures?

① Pursuance of the most appropriate yield curve.

 Lowering borrowing costs.
 Avoiding too low super-long rates.
② Highly sustainable framework.
 Little concern about scarcity of JGBs for purchases.
③ Flexible tool for adjustments according to economic developments.
 Possible to change target rate as with conventional policy.

6
7. Framework of YCC
- How Can BOJ Control JGB Yield Curve?

 Purchases JGBs across all maturities in a substantial scale.

 Increases or decreases the amount of JGB purchases.

 Conducts fixed-rate JGB purchase operations.

 Conducts fixed-rate funds-supplying operations for up to 10 years.

 Announces the schedule for JGB purchase operations, while

determining the amount on the day of the operations.

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8. 9-Month Experience of YCC (1)
% [QQE] [QQE expansion] [QQE w/NIR] [QQE w/YCC]
2.5
2-year 5-year 10-year

20-year 30-year 40-year

2.0

1.5

1.0

0.5

0.0

-0.5
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Source: Japan Bond Trading.

8
9. 9-Month Experience of YCC (2)
- Fixed-rate Operations and Major Changes in Amounts
% [QQE w/YCC]
1.2 [14 Dec] Increased purchase
2-year 5-year 10-year amount of tenors of 10-25Y and >25Y
20-year 30-year 40-year
1.0

0.8

0.6

0.4
[27 Jan] Increased [3 Feb] Fixed-rate
purchase amount of purchase operations [29 Mar][12, 24 Apr][1 May]
tenors of 5-10Y for tenors of 5-10Y Decreased purchase
0.2
amount of tenor of 3-5Y

0.0

-0.2

-0.4
Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17

[17 Nov] Fixed-rate purchase [1 Mar] Decreased purchase [10 Mar][5 Apr] Decreased purchase
operations for tenors of 1-3Y and 3-5Y amount of tenors of 1-3Y and 3-5Y amount of tenor of 1-3Y

Source: Japan Bond Trading. 9

10. Developments in JGB Yield Curve

%
1.0

0.8 8-Jul-16

20-Sep-16
0.6
15-Mar-17

0.4 30-Jun-17

0.2

0.0

-0.2

-0.4

-0.6
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
year

Source: QUICK.

10
11. Gross/Net JGB Purchases by BOJ
Gross Net

tril. yen y/y chg. trillion yen Introduction of YCC

14 100
Floating-rate/Inflation-indexed bonds
Over 10 years Monetary Base
12 5-10 years JGBs
1-5 years
1 yaer or less
90
10

8
80
6

4
70

0 60
Oct-15 Apr-16 Oct-16 Apr-17 Oct-15 Apr-16 Oct-16 Apr-17

Source: Bank of Japan.

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12. Channels through which YCC Affects JGB Yields

① Stock effects
 BOJ’s accumulation of JGB holdings would exert persistent
downward pressure on JGB yields.

② Flow effects
 Market participants are taking for granted the ongoing JGB purchase
operations.

③ Signaling effects
 Fixed rate operation in early February effectively provided
counterparties with an opportunity to sell JGBs at strike price, thereby
enhancing market confidence in YCC.

12
13. USA Case(1942-51) : Overview

 Long-term Treasury bond yield was capped at 2.5%, and short-term

Treasury bill yield was pegged at 0.375% (until July 1947).
 The policy was driven by wartime finance requirements rather than
monetary policy considerations.
 The cap on long-term rates was binding only from late 1947 to
December 1948 when large securities purchases were required.
 Prior to 1947, low inflation and pegging of the TB rates at 0.375%
helped long-term rates to stay below the ceiling. The FED accumulated
bills in its portfolio.
 Inflation pressures eventually led to the Treasury-Fed Accord of 1951,
which discontinued the interest rate cap.

13
14. USA Case(1942-51) : Fed Balance Sheet

Source: Board of Governors of the Federal Reserve System, “Targeting the Yield Curve: The Experience of the Federal
Reserve, 1942-51,” background document for the June 24-25 2003 FOMC Meeting, 2003. 14
15. USA Case(1942-51) :
Comparison with BOJ’s YCC
FED (1942-51) BOJ’s YCC

Purpose Wartime finance Monetary policy

TB rates pegged at 0.375% Short-term policy rate at -0.1%

Framework
Long-term rates capped at 2.5% 10Y target rate at around 0%

Large scale bill purchases prior to

1947 Large scale JGB purchases across all
Operations
Large scale bond purchases during maturities of JGBs
1947-48

Conflict with FED’s monetary Target will be adjusted according to

Final outcome
policy objectives monetary policy considerations

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16. Closing

A key question: Does YCC entail balance sheet risks?

 Amount of JGB purchases may change in order to achieve the intended
JGB yield curve.
 Fluctuations of JGB purchases, though did exist, were not necessarily
significant during past 9 months.
 Appropriate and timely operations and proper communication might
avoid significant expansion of JGB purchases.
 Most importantly, appropriate adjustment of targets according to
economic developments would alleviate potential balance sheet risks.

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