BoJ yield curve control: Is this the way out?

Yesterday, The Bank of Japan (BoJ) introduced a very complex instrument, qualitative and quantitative easing with yield curve control (QQE-YCC). Many financial market practitioners including the investment bank Goldman Sachs wonders, if this can really be pulled off and we at FxWirePro wonder, whether this could be an exit strategy of the Bank of Japan (BoJ).

Well, BoJ governor, Haruhiko Kuroda, himself denied the idea, but we think this could very well be the beginning of a stealth tapering. According to the statement, BoJ will be using the interest rate, which is currently at -0.1 percent to control the short-term yields and tweak asset purchases to control the long-term rates, namely the 10-year yield but the purchases won’t exceed ¥80 trillion per annum.

The two of the biggest risks of a tapering are the yen and the yields. The yen could rise at the news of the tapering as well as the yields. However, with BoJ keeping a lid on the yields, the risk of tapering is somewhat diminished, especially the violent spikes. Now, one might point out that (though none can be sure of) that BoJ might have to purchase more to control the yield curve but there is not only a strong possibility that the BoJ might have to purchase less, the target yield can also be shifted as necessary to reduce the purchase. As a matter of fact, if the yields fall short of the target, which currently set around zero, BoJ can sell assets too.

At this point, we are not saying the BoJ has begun tapering, but this tool is likely to be used in the future to exit the massive easing.

It seems, after the initial dovish impression, the yen has got it right and turned bullish. The yen is currently trading at 100.6 per dollar.