Last week, after a review of monetary policy, the central bank outlined four policies including buying as many assets as necessary for the country to overshoot its 2 per cent inflation target.
The bank also committed to keeping 10-year government bond yields anchored close to 0 per cent.
Like the European Central Bank (ECB), the BoJ has continually failed to push up inflation towards its 2 per cent target. With Japan running slightly ahead of its European peer in terms of unusual monetary policy, the new set of measures will be closely watched.
The pledge to keep 10-year yields near zero could lead to a steepening of the Japanese yield curve as investors move away from long-dated debt entirely, according to Barings director of asset allocation research Christopher Mahon.
He said controlling the 10-year yield via bond buying would not mean a short-term spike in purchases by the central bank. But he added: “The BoJ has committed to spending as much as is required to get inflation to 2 per cent [and] the natural reaction of a longer dated curve should be to sell off.
“I think that will be far more interesting for Japan and the rest of the world than just the simple yield targeting on the 10 year.”
Mr Mahon added: “If the long end of the curve backs up even a little bit in Japan that has big implications for yield plays around the world because so much money has been leaking out of the Japanese bond market into other fixed income assets.”
Iain Stealey, manager of the £391m JPMorgan Strategic Bond fund, said yield control would reduce volatility in the Japanese debt market, which in turn would push more capital across the Pacific into the US.
“They’ve effectively put a cap on. It may go a bit lower [than zero] if you get demand from outside of the BoJ, but [it could] go back to zero with the BoJ supporting. So with the lack of volatility, you’re going to see a continuation of the flow of cash coming out of Asia and Japan to the US.”
However, while investors in Japan could now bring a new influx of capital into US markets, M&G Global Corporate Bond deputy fund manager Wolfgang Bauer said there was too much uncertainty around the policy to make sense of it.
He said the biggest unknown was the BoJ’s motivations – whether it would push the yield back to zero if it went negative or if it was purely a move to prevent government debt becoming more costly.
Mr Bauer said he expected the ECB to watch the policy closely. “The two economic areas are in a similar structural environment with Japan being a couple of years ahead. It could end up being a good showcase for the ECB – targeting yield control could be a policy tool the ECB might try to implement.”
However, both Mr Mahon and Mr Stealey said the political climate in Europe would not allow such a move.
Mr Mahon added: “Already in Europe there’s a big push back from the Germans about ongoing quantitative easing (QE). In the UK, [they are] talking about the impact on pension funds. Over here we are more aware that it’s not just milk and honey that happens when QE is announced.”
KEY NUMBERS
-0.045% Yield on 10-year Japanese government bond
1991 Last time Japan’s annual inflation rate was above 2 per cent
