Need to revise YCC, but burden on households and banks could increase
1% increase in adjustable mortgage rates increases early repayment probability by 25%

In April, the new Bank of Japan regime led by governor Kazuo Ueda got underway in earnest. His primary responsibility is to assess the bank’s current monetary easing policy, which encompasses quantitative and qualitative measures such as yield curve control (YCC). Despite the YCC revision conducted last December, long-term Japanese government bond (JGB) purchases have continued to increase, and the distortion of the yield curve has yet to be rectified. The bond market’s functionality is currently at an all-time low, and the market’s decline is extending to the issuance of corporate and municipal bonds. While overall financial market stress is minimal, volatility in the foreign exchange and JGB markets is on the rise.
This report is a continuation of the JCER Financial Research Team’s report published in Japanese in December 2022. While the prior report focused on the impact of the BOJ’s YCC lifting on the corporate and government sectors, this report aims to provide an empirical analysis of its effect on the household and banking sectors. Higher interest rates would reduce household residential investment and increase the probability of early mortgage repayment. Additionally, regional financial institutions have become increasingly vulnerable to rising interest rates, having taken on a proportionate amount of interest rate risk by lengthening the average maturity of holding securities. The recent instability in the financial system, triggered by a U.S. bank’s collapse, has spread to Europe, and we have to mark the risk of its negative impacts on Japan.