Economic research firm CrossBorder Capital has called the Bank of Japan’s (BoJ) latest monetary policy move a big error and shows a lack of understanding of the yield curve.
The BoJ said in September that it is aiming for yield curve control, through keeping policy rates at -10 basis points and targeting 10-year yields at around zero percent, with a 2% inflation target remaining. However, in a commentary on the policy statement, CrossBorder Capital said it shows that policymakers have little understanding of how the yield curve works, and around 75% of the 10 year yield is due to the term premia which it outside central bank control. “They [central banks] cannot fix the shape: trying to hold down 10-year yields will likely push up 20- and 30-year yields, so resulting in a yield curve with negative convexity,” it commented. In its views on the BoJ policy, it concluded: “In short, the new BoJ policy will distort the term structure, could strengthen the Yen and will likely underscore the need for even more fiscal support. Despite the best intentions of policymakers, they will not overturn the law of economics or make apples fall from the sky!”