Bank of Japan has not shifted direction on monetary policy

The hysteria surrounding the decision by the Bank of Japan (released December 19, 2022) to make a minor adjustment to its yield curve control ceiling on Japanese government 10-year bonds has been predictable but uninformed and full of vested interest agendas. You know the type of agenda that investment bankers engage in where they consistently pump out their media statements, which are soaked up by the financial media as if they are knowledge that needs repeating, that claim interest rates have to rise to deal with some inflation emergency or something. The media doesn’t tell the public who absorb this stuff that the actual agenda is that bankers want higher interest rates because they make more profit and that the reason the media statements give is largely fiction. So we are seeing more of that in the last few days. My understanding of the decision is that it does not signal a fundamental change in monetary policy in Japan. It is a minor shift to tweak the interface between the government bond market and the corporate bond market in order to maintain financial stability – the most important role of a central bank. All those characters that are claiming the hedge funds have won and the Bank of Japan is now conceding power to them with interest rate hikes to come are not reading the room. They are just pushing their self-interest in vain. No interest rates went up and my reading of the statement and what I know informally via contacts is that the Bank is committed to its current policy position because it considers, as I do, the inflationary pressures to be transitory and doesn’t want to respond to an ephemeral problem by creating a more entrenched problem of real economy recession and rising unemployment.

The Internet generate these headlines in my news feed this morning.

The framing, the words, all point to some calamity that is about to manifest.

All unnecessary in fact.

What the Bank of Japan just did

On December 20, 2022, the Bank of Japan released this statement – Statement on Monetary Policy – which announced that:

… the Bank of Japan decided to modify the conduct of yield curve control in order to improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.

The last phrase tells us about the direction of monetary policy – “maintaining accommodative financial conditions”.

The Bank decided to:

1. “The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank” – this is the principle statement.

No change in interest rates announced.

2. “The Bank will purchase a necessary amount of JGBs without setting an upper limit so that 10-year JGB yields will remain at around zero percent” – no limit to the on-going purchases of JGBs in the secondary bond market to keep 10-year bond yields around zero.

In other words, no change in its bond buying program other than to increase the monthly bond purchases by about 20 per cent.

It is prepared to use its infinite financial capacity as the issuer of yen to buy up as many bonds as is necessary to maintain their target range on bond yields.

3. The third part of the announcement signalled a slight variation on existing policy:

While significantly increasing the amount of JGB purchases … the Bank will expand the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points.

The Bank will offer to purchase 10-year JGBs at 0.5 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted. In order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, the Bank will make nimble responses for each maturity by increasing the amount of JGB purchases even more and conducting fixed- rate purchase operations.

So that is the change.

The ceiling for 10-year JGB that the Bank is controlling will rise from 0.25 percentage points to 0.5 percentage points, which is the new yield that the Bank will make offers at.

Remember the yield and the price of a government bond vary inversely and by making bids on price the Bank can control the resulting yield.

Very simple.

A central bank can always do this whenever it wants and can hold the yield at whatever target they like irrespective of what the bond market investors might think is best for them.

The Bank also stated it would continue to purchase non-government financial assets (for example, Exchange-traded funds, real estate trusts) and corporate bonds at rates that prevailed prior to the pandemic.

The response in the financial media

The response in the financial press was overblown to say the least.

The Economist magazine claimed it “may herald a period of tightening” despite the Bank’s statement explicitly stating otherwise.

The Economist claimed that after the announcement the 10-year bond yield had “surged” – it rose modestly from 0.25 to 0.4 per cent in line with the changed policy.

It also claimed that the policy shift “spares the boj months of bond-buying to enforce the old cap, and the greater losses it would endure on its bigger bond portfolio.”

The Bank officials couldn’t care less about any ‘book’ losses that appear on its balance sheet as a result of interest rate changes affecting the sale price of the bonds they have previously bought.

All this talk around the globe at present about central banks taking losses totally misses the point that they are not commercial banks and can carry on with negative capital forever.

One investor quoted by the Economist claimed this was the beginning of “Operation Freedom”, which is code for the investors taking control again and reaping profits at the expense of the Japanese people.

The Bank is not about to allow that to happen even if it is the hope of the money markets.

So what is this about?

There is a multitude of financial assets – government and non-government – which are traded on a daily basis.

They range in maturity from very short-term to very long-term, with the 10-year bond towards the longer end of the available maturity range.

Together the government bonds assets are referred to as the ‘yield curve’, which essentially is just a plot of the current yields from very short-term out to the longer maturity ranges.

Along the curve, yields of non-government financial assets, such as corporate bonds and the J-REITs, are influenced by what is happening in the government bond market.

That, after all, is the principle aim of quantitative easing – to influence the government bond yields at a particular maturity and then allow the ‘market’ to shift the yields of other non-government financial assets into line with the controlled government bond yields.

By increasing demand in the secondary bond market for a specific government bond maturity, the central bank forces up the traded price of that asset and drives the yield down.

It can control the yield at whatever level it chooses by varying the scale of its purchases.

And in doing so, it forces the yields of other non-government bonds etc down, which is the aim.

The central bank hopes that the lower rates at the ‘investment’ end of the yield curve – that is, the longer-term rates, will stimulate borrowing for capital formation in productive capacity (that is, investment), which will serve to stimulate the economy.

QE is not about ‘giving’ the banks etc more cash or liquidity.

It is about driving down long-term interest rates in the hope it will stimulate private investment spending on productive capacity.

The problem with it is that when an economy is languishing no-one wants to borrow anyway, even if borrowing rates fall significantly.

Getting back to the story here though – the Bank of Japan noted in its monetary policy statement that it was concerned that business firms may be finding its ability to fund themselves through corporate debt issuance more difficult.

It also noted that in recent months it has observed increased “volatility in overseas financial and capital markets … [which] … has significantly affected these markets in Japan”.


The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets. Yields on Japanese government bonds (JGBs) are reference rates for corporate bond yields, bank lending rates, and other funding rates. If these market conditions persist, this could have a negative impact on financial conditions such as issuance conditions for corporate bonds.

This is the nub for understanding the change.

Over time, trading in some government bonds at different maturities has been very low and this has also affected the capacity of Japanese firms to issue corporate bonds at reasonable rates.

By allowing the 10-year JGB rate to reach a new, slightly higher ceiling, the Bank is hoping that the relationships along the yield curve will improve and Japanese firms will find more favourable conditions in which to launch their own bond issues.

That is really all there is to it.

The Bank was not responding to any increased inflation threat – it still thinks the current episode is transitory and will dissipate soon enough.

This was just a technical adjustment designed to improve the buying and selling conditions within the bond markets.

Meanwhile, the Japanese government is about to implement is fuel and utilities subsidy scheme in January, a fiscal policy move that will significantly reduce the cost-of-living pressures on Japanese households.

A different country for sure.


Everyone should have just read the last paragraph where the Bank notes:

For the time being, while closely monitoring the impact of COVID-19, the Bank will support financing, mainly of firms, and maintain stability in financial markets, and will not hesitate to take additional easing measures if necessary; it also expects short- and long-term policy interest rates to remain at their present or lower levels.

That tells you that the Bank is not in a panic and about to pull the ‘Operation Freedom’ trigger, despite the hopes of the greedy private market players.

Back to calm.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

This Post Has 9 Comments

  1. “Over time, trading in some government bonds at different maturities has been very low and this has also affected the capacity of Japanese firms to issue corporate bonds at reasonable rates.

    By allowing the 10-year JGB rate to reach a new, slightly higher ceiling, the Bank is hoping that the relationships along the yield curve will improve and Japanese firms will find more favourable conditions in which to launch their own bond issues.”

    In other words, the BOJ is hoping the 10 year adjustment will enable firms to raise more funds through corporate debt than they’ve been able to. In the meantime, the BOJ will continue buying up corporate debt to help the businesses fund themselves, which aligns with their full employment objectives. In time, the firms will hopefully be able to raise the capital themselves without BOJ purchases.

    The BOJ are macroeconomic heavyweights in comparison to the Western CBs. Most importantly, they seem to view monetary policy as an important stabilisation tool, even though fiscal policy drives the show. Love it.

  2. I heard an interesting summary yesterday.

    In economics there are developed countries and developing countries.

    There there is Argentina and Japan

    A compare and contrast of those two from an MMT perspective would be an interesting project for somebody – possibly a PhD project for somebody?

  3. Hi Bill, I am confused by something you have written. How do I interpret the following:

    “By allowing the 10-year JGB rate to reach a new, slightly higher ceiling, the Bank is hoping that the relationships along the yield curve will improve and Japanese firms will find more favourable conditions in which to launch their own bond issues.”

    I’m not sure how the corporate bond market works in Japan (versus, say, the US), but was there a blowout in corp. spreads (over the JGBs) at the longer end of the curve (hence more expensive debt funding)? And if so, did the BOJ make the policy change hoping to somehow ‘equivalise’ the the cost of debt for longer term corp. borrowers to ensure a more appropriate premium?

    Thanks in advance. [Would welcome anybody’s feedback on this, if Bill doesn’t have time to respond.]

  4. There’s a big difference between Japan, the US and the EU block.
    Japan has an industry to protect and the government (that INCLUDES the Central Bank of Japan from which is fully dependent) is working hard to keep Japanese industry – IN Japan!
    By contrast, the US lost most of its industries.
    Besides the industries, something else has been lost: the know how. Today, there’s little chance to restore what was lost.
    But, there’s a war on the making and no one has a chance of winning – if they utterly depend on the enemy’s factories for the basics!
    Oops! – globalization depends on peace and history just came back hard.
    So, with energy prices skyrocketing (thanks to selfimposed sanctions), the remaining industry in the EU blob is facing either bankrupcy or reallocation to cheaper grounds.
    And, there’s a sweet song from across the Atlantic Ocean, luring the european industry to move to uncle sam’s land. Mexican workers are good labor.
    What about the EU?
    Some of us have doubts if it still exists.

  5. They all know how it works.

    The mainstream media response to Japan is geopolitical. TINA and look what happens if you decide to be truly independent and choose your own path versus the US rule based order. It’s all about control and making sure countries stay under the US security umbrella.

    In exactly the same way they are all pushing we have ran out of keystrokes narrative and there is no money left for strikers. That deficits and debts have to be reduced the household budget narrative being served up in a plate again. Every media outlet saying the same thing portrayed as expert knowledge.

    Everybody has had a front row seat of the Ukraine war. Everybody has seen how the mainstream media has acted and how censorship was introduced to close down an alternative point of view.

    This is no different it is exactly the same. It is not just happening in the world’s of economics and war. It happens with just about any subject you can think of. There is now no such thing as a free press which holds governments to account. Every type of framing and narratives used is for geopolitical purposes.

    Thomas Fazi wrote a piece in 2017 – What Is Needed Is A Progressive Vision Of National Sovereignty.

    Which was linked to Bills and Thomas book reclaiming the state.

    It is not by accident or by pure luck the majority of truths coming out of Ukraine are coming out of Tucker Carlson, Douglas Macregor, the American Conservative, zero hedge lips. It is the tactic being used to keep pushing the public right. The strategy being to destroy the left once and for all and the liberals are in on it.

    Any true left wing voice like Glenn Greenwald, George Galloway, Jimmy Dore, are joining up with the extreme right and pushing their followers into the arms of the right wing media. As it is the only way they can get their message across. Glenn Greenwald and Jimmy Dore are now regulars on Fox news. George Galloway is now a regular on GB news.

    The exact same strategy and tactics used by Farage to get left wing voters on board for the Brexit vote. The left are being enticed to stand shoulder to shoulder with the extreme right, just so they can get their message out. Some truths in the world of myths.

    All it means in the end is nothing changes the status quo remains. Geopolitics is all that matters and the liberals and the right are joined at the hip. The left are being used by the liberals and the right to funnel more left wing voters into the arms of the right wing spectrum. The right wing media outlets who have been allowed to speak some truths whilst everyone else lives behind censorship.

    The exact same strategy and tactics used as described in Thomas Fazi’s article above.

    And yet, Thomas Fazi is now standing shoulder to shoulder with some of these extreme right wing characters to try and get a voice in Italy and his message across. As it is the only option he has.

    Thomas, Glenn Greenwald, George Galloway, Jimmy Dore will all be dropped like a stone by the extreme right after they have handed left wing voters over to them. In the same way Farage and the reform party and the Tories have shafted left wing voters and the red wall after Brexit.

    The left have to split like the right have split in the UK. Or this pattern will forever continue. The left have to create a political vehicle that gives left wing voters a voice and a left wing media platform. A left wing channel like GB news and Talk TV which are vehicles for UKIP and the reform party. The funding of which clearly comes from the American right.

    The liberals and right over the last 50 years have caused this geopolitical / economic mess. The genius of the system they have set up, is the only outlet available to anybody who wants to vent their anger against them is the extreme right.

    Think about that. It didn’t happen by accident or by luck. $ billions have been spent to make it so. Now it is a very common state of affairs that a very prominent left wing social media face. Will provide a link to the extreme right in order to get their message across to try and get a voice.

    Where are the left wing media channels that isn’t liberal ?

    The liberals and the right are systematically destroying the world wide left. After the Ukraine debacle the left will be lucky to survive. As the right continues to portray Biden and the democrats as the extreme left. When they are a moderate right wing party. This strategy and tactics is 50 years old and created the voiceless political landscape we all live in.

  6. There is no left and right any more. Now we are either Globalists and Westerphalians. Fixed exchange rate vs floating exchange rate. One currency vs multiple currencies. Autocracy vs democracy.

    The first battle to win is retaining the ability to change anything.

  7. Yes,

    I totally agree Neil, you can see that shift happening and left and right wing voters moving into these different camps. Driven by social media platforms that provide both a voice and an escape from the mainstream view. However, the majority of which are funded by the right and who have their own agenda and startle them with disco lights and their own confirmation bias once they arrive there.

    But the extreme right are portraying themselves as Westerphalians to hoover up the votes. When it was them who started this globalist geopolitical revolution. With the liberals moving to this position later after hijacking left wing parties across the globe. Using the strategy and tactics described above.

    The true Westerphalians are sections of the left who believe in international law and not the US rules based order and they have been neutered. With the extreme right pretending to play that role with China set firmly in their sights. Speaking out of both sides of the same mouth saying different things.

    The whole point of which is to make sure the battle to implement change does not happen. Those pushing the hardest for the change are the extreme right and Trump voters. Those that voted for Thatcher and Reagan. The two people who started this car crash. Who the majority of liberals would happily vote for before the likes of Corbyn.

    The money behind it all is pushing for the laffer curve of economics. That Thatcherism and Reaganism is wonderful and the answer to this mess. What Trump and Farage and the reform party stand for. Who pretend they are pushing for change but are just wanting to come full circle.

    The money and establishment making sure the blob absorbs any threat to the status quo. So that the Republicans and Liberals can fight Russia and China on two fronts and drag everybody else with them.

    MMT’rs have faced the exact same experience for decades. The liberals have been our biggest enemy as they set out to destroy us. It is their job to extinguish any threats to the geopolitical landscape from the left. Fights with the right have been very rare in comparison. Parts of the right have even embraced areas of MMT more than the liberals ever did. We have all experienced this phenomenon first hand. Yet, they will never accept us for geopolitical purposes.

    The geopolitical chessboard is all that matters. The first battle to win is retaining the ability to change anything – looks like a pipe dream today. Any threat is smashed by regime change and just look at the poison coming out of Western parliamentarians to try and prevent change and keep complete control of the narrative and framing. As they threaten anybody who steps out of line.

    All is not lost and there is still hope. There is always a lag when huge shifts in geopolitics happens. It takes time for countries to assess and analyse their new reality, as these big shifts tend to happen very quickly.In my view the only hope for any real chance to implement change is if the US has overplayed its hand.

    Due to the lag effect is still to show itself. Will countries still accept being dragged into war after war after what’s happened over the last year. How many countries are secretly saying to themselves enough is enough. How many countries are secretly supporting both Russia and China knowing full well if both fall then they are next for invasion. How many countries are publicly supporting the US but privately hoping they fail.

    So the real question is has the US overplayed their hand ?

    We’ll all have to wait and see how it plays out and if they have, I believe this is when real change will happen. Many countries will probably breathe a huge sigh of relief.

  8. @ Neil Wilson. If you think it’s as simplistic as autocracy vs democracy then you ought to visit/revisit the Political Compass test.
    @ Derek Henry ‘censorship was introduced to close down an alternative point of view.’ There’s nothing new in the slanted and simplistic story told by the mainstream. But it is entirely possible to read more scholarly accounts of Russian (imperialism) and Ukraine history if one has a mind. Also, frankly, one should have about as much time for ‘left-wingers’ who jump into bed with the extreme right as for those in mainstream parties who pretend to be of the left and progressive while doing everything to preserve the status quo.

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