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

1. BOJ’s Balance Sheet

Liabilities and Net assets Assets

0

100

200

300

400

500

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

Others

ETF・REIT

CP・Corporate bonds

Funds-Supplying Operationsagainst Pooled CollateralJGB

tril. yen

0

100

200

300

400

500

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

OthersBanknotesCurrent deposits

凡例用

tril. yen

Source: Bank of Japan.

2

2. Balance Sheets of Major Central Banks (Ratio to nominal GDP)

0

20

40

60

80

100

120

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

Bank of JapanFederal Reserve SystemEuropean Central BankBank of EnglandSwiss National Bank

%

Sources: Cabinet Office; Bank of Japan; Federal Reserve; BEA ; ECB; Eurostat; Haver.

New framework comprises of Yield Curve Control and Inflation-Overshooting Commitment.

3

Yield Curve Control (YCC)

Inflation-Overshooting Commitment

0

20

40

60

80

100

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Japan

United States

Euro area

% of nominal GDP

CY

around 20%

around80%

Future developments

3

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

0 1 2 3 4 5 6 7 8 9 10 15 20 30 40

%

year

Recent shape of JGB yield curve

Short-term policy interest rate "minus 0.1 percent"

Target level of a long-term interest rate"around zero percent"

residual maturity

JGB Yield Curve

Target level of a long-term interest rate of “around zero percent”

Short-term policy interest rate of “minus 0.1 percent” Around

80%

Around 20%

3. Overview of BOJ’s Monetary Policy - New Monetary Policy Framework Since September 2016

Sources: Bloomberg; Cabinet Office; Bank of Japan; Federal Reserve; BEA ; ECB; Eurostat.

Monetary Base: % of nominal GDP

4 Notes: Latest data for Output Gap as at the October-December quarter of 2016. CPI data as at the January-March quarter of 2017.

Output Gap CPI

4. Where Are We Now? - Halfway toward the price stability target of 2%

-8

-6

-4

-2

0

2

4

6

8

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

%

-4

-3

-2

-1

0

1

2

3

4

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

All items, less fresh food

All items, less fresh food and energy

%

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

• 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.

5

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. FOMC’s Consideration on Targeting a Long-Term Treasury Yield (October 2010)

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.

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6. How Different is YCC from Previous Unconventional Measures?

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.

7

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

8

8. 9-Month Experience of YCC (1)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

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

2-year 5-year 10-year

20-year 30-year 40-year

% [QQE] [QQE expansion] [QQE w/YCC][QQE w/NIR]

Source: Japan Bond Trading.

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

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

2-year 5-year 10-year

20-year 30-year 40-year

% [QQE w/YCC]

[17 Nov] Fixed-rate purchase operations for tenors of 1-3Y and 3-5Y

[14 Dec] Increased purchaseamount of tenors of 10-25Y and >25Y

[27 Jan] Increased purchase amount of tenors of 5-10Y

[10 Mar][5 Apr] Decreased purchase amount of tenor of 1-3Y

[1 Mar] Decreased purchase amount of tenors of 1-3Y and 3-5Y

[3 Feb] Fixed-rate purchase operations for tenors of 5-10Y

[29 Mar][12, 24 Apr][1 May] Decreased purchase amount of tenor of 3-5Y

9

9. 9-Month Experience of YCC (2) - Fixed-rate Operations and Major Changes in Amounts

Source: Japan Bond Trading.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

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

8-Jul-16

20-Sep-16

15-Mar-17

30-Jun-17

%

year

10

10. Developments in JGB Yield Curve

Source: QUICK.

11

Gross Net

11. Gross/Net JGB Purchases by BOJ

0

2

4

6

8

10

12

14

Oct-15 Apr-16 Oct-16 Apr-17

Floating-rate/Inflation-indexed bondsOver 10 years5-10 years1-5 years1 yaer or less

tril. yen

60

70

80

90

100

Oct-15 Apr-16 Oct-16 Apr-17

Monetary BaseJGBs

y/y chg. trillion yen Introduction of YCC

Source: Bank of Japan.

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.

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12. Channels through which YCC Affects JGB Yields

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

13. USA Case(1942-51) : Overview

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

FED (1942-51) BOJ’s YCC

Purpose Wartime finance Monetary policy

Framework TB rates pegged at 0.375% Long-term rates capped at 2.5%

Short-term policy rate at -0.1% 10Y target rate at around 0%

Operations

Large scale bill purchases prior to 1947 Large scale bond purchases during 1947-48

Large scale JGB purchases across all maturities of JGBs

Final outcome Conflict with FED’s monetary policy objectives

Target will be adjusted according to monetary policy considerations

15

15. USA Case(1942-51) : Comparison with BOJ’s YCC

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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.