EC BoJ Bungles Rather Than Rebuilds

The Bank of Japan had announced another acronym with which to add to QQE, a term that already includes an extra “Q”, on September 21, 2016. It was a bizarre engagement, like something out of a TV advertisement for laundry detergent or diet supplements where the central bank marketed the same QQE that you always knew and loved but now with added YCC. Those additional letters mean “yield curve control” and in some ways it is a contradiction with QQE.

On November 17 last year, not quite two months into the expanded definitions, BoJ offered to buy an unlimited quantity of 2- and 5-year bonds at -9 bps and -4bps. Those bids were well below market prices at the time, so small wonder there were no takers. There weren’t meant to be any, however, as it was simply a demonstration of intent. As usual, the effects have been debatable.

When BoJ established the offer, the 2-year JGP was “yielding” -11 bps. The yield fell back lower (more negative) again afterward, as low as -24.6 bps before registering -23.1 bps Friday. The 5-year JGB was -5.7 bps the day before, -10.1 bps the day of the announcement and like the 2-year moved lower in yield (higher in price) at least at first. The lowest point was reached on January 24, but the last yield last week was -9.6 bps, just a little less than the day the policy tender was put in place.

The differences in response to the added YCC are related by length of maturity, raising some serious doubts about ability. Why did the BoJ focus on 2s and 5s rather than 10s which had at that moment violated the zero yield threshold for YCC? It was a curious omission, one that BoJ finally felt compelled enough to act only last week. In that way, BoJ seems to have established not yield curve control but rather its opposite. That may have been the central bank’s primary worry on November 17, as hoping to “scare” the yield curve into compliance with its new JGB bids.