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 Banknotes ETF ・ REIT Current deposits 400 400 CP ・ Corporate bonds 凡例用 Funds-Supplying Operations against Pooled Collateral 300 300 JGB 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: % of nominal GDP % of nominal GDP 0.8 Recent shape of 100 JGB Yield Curve JGB yield curve 0.6 Future Japan developments Target level of a 80 Target level of a Short-term Short-term United States long-term 0.4 long-term policy interest policy interest interest rate of interest rate rate "minus rate of “minus Euro area “around zero around 0.1 percent" "around zero 0.1 percent” Around percent” 60 80% percent" 80% 0.2 40 0.0 Around around 20% 20% 20 -0.2 -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? Pursuance of the most appropriate yield curve. ① Lowering borrowing costs. Avoiding too low super-long rates. Highly sustainable framework. ② Little concern about scarcity of JGBs for purchases. Flexible tool for adjustments according to economic developments. ③ 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. 7
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 [3 Feb] Fixed-rate [27 Jan] Increased purchase operations purchase amount of [29 Mar][12, 24 Apr][1 May] for tenors of 5-10Y 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 9 Source: Japan Bond Trading.
10. Developments in JGB Yield Curve % 1.0 8-Jul-16 0.8 20-Sep-16 0.6 15-Mar-17 30-Jun-17 0.4 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 Introduction of YCC y/y chg. trillion yen 14 100 Floating-rate/Inflation-indexed bonds Monetary Base Over 10 years 5-10 years JGBs 12 1-5 years 1 yaer or less 90 10 8 80 6 4 70 2 60 0 Oct-15 Apr-16 Oct-16 Apr-17 Oct-15 Apr-16 Oct-16 Apr-17 Source: Bank of Japan. 11
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 maturities of JGBs Large scale bond purchases during 1947-48 Conflict with FED’s monetary Target will be adjusted according to Final outcome policy objectives monetary policy considerations 15
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. 16
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