Yield Curve Control and Balance Sheet July 2017 Seiichi SHIMIZU - - PowerPoint PPT Presentation

Yield Curve Control and Balance Sheet

July 2017 Seiichi SHIMIZU BANK OF JAPAN

The views presented here are those of the author and do not necessarily reflect those of the Bank of Japan

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• 1. BOJ’s Balance Sheet

Liabilities and Net assets Assets

100 200 300 400 500 Mar-07 Sep-08 Mar-10 Sep-11 Mar-13 Sep-14 Mar-16 Others ETF・REIT CP・Corporate bonds Funds-Supplying Operations against Pooled Collateral JGB

• tril. yen

100 200 300 400 500 Mar-07 Sep-08 Mar-10 Sep-11 Mar-13 Sep-14 Mar-16 Others Banknotes Current deposits 凡例用

• tril. yen

Source: Bank of Japan.

2

• 2. Balance Sheets of Major Central Banks

(Ratio to nominal GDP)

20 40 60 80 100 120 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 Mar-15 Bank of Japan Federal Reserve System European Central Bank Bank of England Swiss National Bank %

Sources: Cabinet Office; Bank of Japan; Federal Reserve; BEA ; ECB; Eurostat; Haver.

New framework comprises of Yield Curve Control and Inflation-Overshooting Commitment.

3

Yield Curve Control (YCC) Inflation-Overshooting Commitment

20 40 60 80 100 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Japan United States Euro area

% of nominal GDP CY around 20% around 80% Future developments

3

• 0.4
• 0.2

0.0 0.2 0.4 0.6 0.8 1 2 3 4 5 6 7 8 9 10 15 20 30 40 %

year

Recent shape of JGB yield curve Short-term policy interest rate "minus 0.1 percent" Target level of a long-term interest rate "around zero percent" residual maturity

JGB Yield Curve Target level of a long-term interest rate of “around zero percent” Short-term policy interest rate of “minus 0.1 percent”

Around 80% Around 20%

• 3. Overview of BOJ’s Monetary Policy
• New Monetary Policy Framework Since September 2016

Sources: Bloomberg; Cabinet Office; Bank of Japan; Federal Reserve; BEA ; ECB; Eurostat.

Monetary Base: % of nominal GDP

4 Notes: Latest data for Output Gap as at the October-December quarter of 2016. CPI data as at the January-March quarter

• f 2017.

Output Gap CPI

• 4. Where Are We Now?
• Halfway toward the price stability target of 2%
• 8
• 6
• 4
• 2

2 4 6 8 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 %

• 4
• 3
• 2
• 1

1 2 3 4 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 All items, less fresh food All items, less fresh food and energy %

Sources: Bank of Japan; Ministry of Internal Affairs and Communications.

• Benefits

 Possible to work directly on lowering the long-term rate.  An announcement of a target that clarifies perceptions could

prompt the rate to move down without purchasing securities in significant quantity.

• Remarks or drawbacks

 Adjustments in the cap would likely be needed.  Substantial volatility in central bank securities holdings.  Complications for exit from targeting approaches.

5 Source: Board of Governors of the Federal Reserve System, “Strategies for Targeting Interest Rates Out the Yield Curve,” background document for the October 15 2010 FOMC Meeting, 2010.

• 5. FOMC’s Consideration on Targeting

a Long-Term Treasury Yield (October 2010)

①

Pursuance of the most appropriate yield curve.



Lowering borrowing costs.



Avoiding too low super-long rates.

②

Highly sustainable framework.



Little concern about scarcity of JGBs for purchases.

③

Flexible tool for adjustments according to economic developments.



Possible to change target rate as with conventional policy.

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• 6. How Different is YCC from Previous

Unconventional Measures?

 Purchases JGBs across all maturities in a substantial scale.  Increases or decreases the amount of JGB purchases.  Conducts fixed-rate JGB purchase operations.  Conducts fixed-rate funds-supplying operations for up to 10 years.  Announces the schedule for JGB purchase operations, while

determining the amount on the day of the operations.

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• 7. Framework of YCC
• How Can BOJ Control JGB Yield Curve?

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• 8. 9-Month Experience of YCC (1)
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 2-year 5-year 10-year 20-year 30-year 40-year

%

[QQE] [QQE expansion] [QQE w/YCC] [QQE w/NIR]

Source: Japan Bond Trading.

• 0.4
• 0.2

0.0 0.2 0.4 0.6 0.8 1.0 1.2 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 2-year 5-year 10-year 20-year 30-year 40-year

%

[QQE w/YCC] [17 Nov] Fixed-rate purchase

• perations for tenors of 1-3Y and 3-5Y

[14 Dec] Increased purchase amount of tenors of 10-25Y and >25Y [27 Jan] Increased purchase amount of tenors of 5-10Y [10 Mar][5 Apr] Decreased purchase amount of tenor of 1-3Y [1 Mar] Decreased purchase amount of tenors of 1-3Y and 3-5Y [3 Feb] Fixed-rate purchase operations for tenors of 5-10Y [29 Mar][12, 24 Apr][1 May] Decreased purchase amount of tenor of 3-5Y

9

• 9. 9-Month Experience of YCC (2)
• Fixed-rate Operations and Major Changes in Amounts

Source: Japan Bond Trading.

• 0.6
• 0.4
• 0.2

0.0 0.2 0.4 0.6 0.8 1.0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 8-Jul-16 20-Sep-16 15-Mar-17 30-Jun-17 % year

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• 10. Developments in JGB Yield Curve

Source: QUICK.

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Gross Net

• 11. Gross/Net JGB Purchases by BOJ

2 4 6 8 10 12 14 Oct-15 Apr-16 Oct-16 Apr-17 Floating-rate/Inflation-indexed bonds Over 10 years 5-10 years 1-5 years 1 yaer or less

• tril. yen

60 70 80 90 100 Oct-15 Apr-16 Oct-16 Apr-17 Monetary Base JGBs y/y chg. trillion yen Introduction of YCC

Source: Bank of Japan.

① Stock effects  BOJ’s accumulation of JGB holdings would exert persistent downward pressure on JGB yields. ② Flow effects  Market participants are taking for granted the ongoing JGB purchase

• perations.

③ Signaling effects  Fixed rate operation in early February effectively provided counterparties with an opportunity to sell JGBs at strike price, thereby enhancing market confidence in YCC.

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• 12. Channels through which YCC Affects JGB Yields

 Long-term Treasury bond yield was capped at 2.5%, and short-term

Treasury bill yield was pegged at 0.375% (until July 1947).

 The policy was driven by wartime finance requirements rather than

monetary policy considerations.

 The cap on long-term rates was binding only from late 1947 to

December 1948 when large securities purchases were required.

 Prior to 1947, low inflation and pegging of the TB rates at 0.375%

helped long-term rates to stay below the ceiling. The FED accumulated bills in its portfolio.

 Inflation pressures eventually led to the Treasury-Fed Accord of 1951,

which discontinued the interest rate cap.

13

• 13. USA Case(1942-51) : Overview

14 Source: Board of Governors of the Federal Reserve System, “Targeting the Yield Curve: The Experience of the Federal Reserve, 1942-51,” background document for the June 24-25 2003 FOMC Meeting, 2003.

• 14. USA Case(1942-51) : Fed Balance Sheet

FED (1942-51) BOJ’s YCC Purpose Wartime finance Monetary policy Framework TB rates pegged at 0.375% Long-term rates capped at 2.5% Short-term policy rate at -0.1% 10Y target rate at around 0% Operations Large scale bill purchases prior to 1947 Large scale bond purchases during 1947-48 Large scale JGB purchases across all maturities of JGBs Final outcome Conflict with FED’s monetary policy objectives Target will be adjusted according to monetary policy considerations

15

• 15. USA Case(1942-51) :

Comparison with BOJ’s YCC

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• 16. Closing

A key question: Does YCC entail balance sheet risks?

 Amount of JGB purchases may change in order to achieve the intended

JGB yield curve.

 Fluctuations of JGB purchases, though did exist, were not necessarily

significant during past 9 months.

 Appropriate and timely operations and proper communication might

avoid significant expansion of JGB purchases.

 Most importantly, appropriate adjustment of targets according to

economic developments would alleviate potential balance sheet risks.