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Financial Research Monetary Policy after YCC Revision

If the YCC is Lifted, Long-term Interest Rates could Rise to 0.8–1.1%; Aftermath for Businesses and Public Finances

A Revision to the Massive Easing Policy Triggered by Global Inflation

Research Director:Ikuko FUEDA-SAMIKAWA
  Principal Economist
Lead Researcher:Takashi MIYAZAKI
  Senior Economist
Researcher:Mayuko Abe



At its monetary policy meeting held on the 19th and 20th of December 2022, the Bank of Japan augmented the widens the band of long-term interest rates, which was previously established at ±0.25% around zero, to ±0.5%, thereby effectively raising interest rates. As major central banks in Europe and the U.S. pursued a course of raising interest rates due to the rising global inflation, Japan’s long-term interest rates also underwent upward pressure, and the BOJ’s acquisition of Japanese Government Bonds (JGBs) escalated as a component of its quantitative and qualitative monetary easing strategy that incorporates interest rate controls in the long and short term (commonly referred to as “yield curve control” or YCC). There were also side effects of the YCC, such as decline in the functioning of the JGB market and the historic yen depreciation. The YCC’s impacts were limited to newly-issued 10-year JGBs, and the yield curve remained distorted despite the expansion of the band at which it allows long-term interest rates. Based on the BOJ’s ruling in December, we assessed the influence of higher long-term interest rates on corporate capital investment and fiscal sustainability: If the YCC is lifted, Japan’s long-term interest rates will rise to 0.8%-1.1%, and the increased burden of interest payments will put downward pressure on current profits and capital investment. The government sector will also witness a deterioration in fiscal sustainability. The present yield curve gap (the gap between the actual real yield curve and the equilibrium yield curve) is neutral in the long-term zone, and excessive tightening must be avoided when lifting the YCC. Since it is predicted to take longer for inflation to diminish in Japan, the U.S., and Europe, the government and the BOJ will need to handle fiscal and monetary policies with more cohesion than ever before.