As inflation and high interest rates continue, YCC makes adjustments

Analysts anticipate that the Bank of Japan may further fine-tune its yield curve control (YCC) policy at Tuesday's meeting, as recent data shows an increase in Japan's inflation rate, while rising bond yields and depreciation of the yen are also increasing pressure.

Central banks are expected to maintain ultra-low interest rates, but if there are signs of tenacious inflation, there is a possibility that central banks will expand the range of yield curve control.

Recent Nikkei and Bloomberg reports also suggested that the central bank is considering such a move as selling pressure on the bond market until October intensifies.

Japan's 10-year index yield has been approved by the Bank of Japan in the range of -1% to 1% under the YCC policy, but it is getting close to testing the central bank's upper limit target. The 10-year yield recorded 0.89% on Monday, a high level for the first time in 10 years.

Central banks intervened in the bond market several times over October in order to calm overheated yields.

Bank of America analysts said there is a possibility that the Bank of Japan will expand the YCC target range from -1.5% to 1.5%. ING analysts said that although the Bank of Japan will maintain the current 1% range, there is a possibility that the intermediate target of the range will be raised from 0% to 0.25% or 0.5% instead.

“A weak yen will increase inflationary pressure and eventually hit consumption, while a sharp rise in interest rates will hit corporate investment. Meanwhile, the increase in government bond purchase operations will place a greater burden on the Bank of Japan,” an ING analyst wrote in a recent memo.

Since the core inflation rate (inflation rate excluding rapidly fluctuating fresh food prices) has exceeded the Bank of Japan's target of 2% for 18 consecutive months, changes in the Bank of Japan's inflation rate forecast are widely anticipated.