Bank of Japan: Japan Yield Curve Control Regime



Spring 2018

Japan’s long-lasting deflation has been a severe problem for the Japanese economy for decades. In April 2013 and January 2016, the new Governor Haruhiko Kuroda led the Bank of Japan (BOJ) to initiate Quantitative and Qualitative Monetary Easing (QQE) and QQE with Negative Interest Rate Policy (NIRP) to deal with this issue. However, even after three years since QQE was implemented, the inflation rate was still below 2 percent. In September 2016, the BOJ introduced QQE with Yield Curve Control (YCC)—a new program that targets both short-term and long-term policy interest rates, to resolve the issues created by QQE and QQE with NIRP, aiming at an inflation overshooting target of 2%.

This Capstone project aimed to analyze the reasons behind the BOJ's shift to YCC, as well as the implementation and market impact of the new policy framework. In addition, the Capstone team sought to provide a framework through which the Federal Reserve System could consider sponsoring a YCC-like program in the United States. The Capstone report first covered the background, objectives, rationale, and market impact of the BOJ's QQE (2014) and QQE with NIRP (early 2016), identifying the limitations of the two policies, including a flattened yield curve and deterioration of financial institutions' profitability. The report then proceeded to provide a detailed analysis of the design, communication, implementation, and market impact of the BOJ's YCC policy. Finally, the report reviewed the Fed's current monetary policy tools and explains how YCC could fit into the Central Bank's toolkit.

The Capstone report and final presentation incorporated several key recommendations from the client. These recommendations included an analysis of benefits and risks of a Fed-sponsored YCC, which would allow for greater stability in the level and volatility of interest rates, but might also entail risks such as excessive increase of the Fed's balance sheet and capital losses upon exit.