These comments make the BoJ meeting at the end of this month more important than usual. It could lead to a policy of ‘yield curve slope control’, whereby the central bank not only seeks to maintain a grip on the level of interest rates across the curve (yield curve control) but also on the difference between e.g. the 40 year yield and yields for maturities of 10 year or less (control of the slope of the yield curve). To this end, JGB purchases could be concentrated at the shorter end of the spectrum, leaving room for yields on very long maturities to rise, or at least not to decline. Whether that would actually happen remains to be seen and is even doubtful: yield hungry investors might be keen to seize the buying opportunity as soon as long-dated yields become slightly more attractive.
Should the BoJ decide to move in that direction, this would also be important for the rest of the world. Firstly, because decisions taken in Japan can have knock-on effects abroad. When the BoJ published its October schedule for bond purchases, it caused a rise in US treasury yields because it indicated there would fewer purchases than normal at the longer end of the maturity spectrum[3]. Secondly, it will be watched carefully in Europe. With interest rates solidly in negative territory, even for long maturities, in many eurozone countries and inflation stuck well below the ECB target, the thesis that the eurozone is going down the path of Japan (Japanisation or Japanification) has been gaining popularity: “if you want to know where the eurozone will be in a couple of years, look where Japan is today”. From this perspective, were the BoJ to move to a policy of ‘yield curve slope control’, it would intensify the debate in the eurozone about the unintended consequences of ECB policy for pension funds and insurance companies.
