Incoming Bank of Japan governor Kazuo Ueda confessed that he did not have a “magical” monetary policy solution to resolve the nation’s decades-long battle to spur inflation when he appeared in front of the Japanese parliament last week.
But as the 71-year-old economist prepares to become the first academic to take the helm of the Japanese central bank in April, there was a crucial hint he dropped at parliamentary hearings that finished on Monday: the BoJ’s policy of capping long-term government borrowing costs through vast bond purchases — known as yield curve control — was unlikely to survive in its existing form under the new regime.
Any change to the BoJ’s efforts to keep 10-year yields rooted near zero will have a significant impact on global financial markets, given the gulf that has opened up between the yields in Japan’s vast bond market and those elsewhere in the developed world, as central banks in the US and Europe aggressively raised interest rates over the past year. If the BoJ allows yields to rise, Japanese investors who have had to look overseas for returns would likely bring their cash home, inflicting further losses on global bonds but boosting the yen.