The Bank of Japan (BOJ) has tweaked its bond yield control policy and will allow interest rates to rise more freely, action that market participants have interpreted as the start of a slow shift away from decades of massive monetary stimulus.
Since 2016, the BOJ has guided short-term interest rates at minus 0.1% and the 10-year government bond yield at around 0% in action known as yield curve control . It has also set an allowance band of 0.5% above and below the 10-year yield target.. But it watered down the band to a "reference" rather than a "rigid limit," and said it will allow the 10-year yield to move above the cap as long as it stays below 1.0%.
However, political considerations also likely played a part. A weak yen against the U.S. dollar has become a headache for the government by boosting household living expenses via higher import costs. Moreover, currency intervention has been hard to justify with recent yen movement being fairly moderate.
Policymakers will scrutinise data to see whether the economy can weather global headwind and allow firms to keep raising prices and wages next year.
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