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BOJ Shifts Policy Framework to Targeting Japan’s Yield Curve 

September 21, 2016

Toru Fujioka, Bloomberg

The Bank of Japan shifted the focus of its monetary stimulus Wednesday from expanding the money supply to controlling interest rates, which some economists deemed as further evidence that BOJ policy had reached the limits of its effectiveness.

The central bank said it would adjust the volume of its asset purchases, the core of its framework until now, as necessary in the short term to control bond yields, while keeping it at about 80 trillion yen ($780 billion) annually over the long term. The BOJ also scrapped a target for the average maturity of its holdings of government bonds.

The changes will help the BOJ manage the impact of its purchases and negative interest rates on Japanese banks, whose profits have been squeezed by a narrowing of short-term and long-term yields. Governor Haruhiko Kuroda and the policy board kept that negative rate, imposed on a share of bank reserves, unchanged at minus 0.1 percent.

Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, saw the shift as a tacit admission by the BOJ that it has reached the limits of its JGBs purchases. The BOJ now owns more than a third of outstanding JGBs, with the pace of its buying draining the market of supply. Read more

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