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The Bank of Japan (BoJ) doesn’t have any recent experience with raising interest rates. Since the legendary bubble of the late 80’s popped rates have been on a one way street to zero, until recently (Chart 1). A similar phenomenon has been experienced in the United States as well. Volker raising rates to break the back of inflation in the 70s and 80s is eulogized by many, and rates have steadily declined ever since (Chart 2).

The supply shocks and reactionary policies of 2021 and 2022 changed everything, and for the first time in forty years inflation was present in the dominant ‘Western’ economies.

What I want to explore today is: Under what circumstances does the BoJ change their yield curve control (YCC) bands? Specifically, do they adjust YCC when interest rates are near the stated limits, or do they make sure yields are well below those limits before making an adjustment?

BoJ History of YCC

YCC by the BoJ was the inevitable summation of more than a decade of influencing bond prices in Japan. Introduced in September 2016 (Chart 3), the initial purpose of YCC was to keep 10-year JGB yields from falling too low, not from rising. This is visible on Chart 3 if you look at the 10-year yield before introduction of YCC policy in 2016. Yields are well below -0.20%. Quickly, though, YCC policy became used to cap rates, not support them.

The policy was quite effective for the first five years, with the BoJ adjusting the 10-year YCC bands once in 2018 with minimal impact. Everything changed, however, when the US, EU, and other major central banks started raising interest rates in 2022 to combat what did in fact turn out to be transitory inflation.

Japanese short term benchmark yields were kept near zero, while the rest of the world quickly moved to 3, 4, and then 5%. This had a disastrous effect on the Yen’s exchange rate and led to the market effectively raising rates for the BoJ, as evidenced in Chart 3. You can see the purple line (10-year JGB OIS rate), which is set by market participants not the BoJ rapidly lead 10-year JGB rates higher starting in early 2022.

It is clear that post-pandemic YCC policy has been challenging for the BoJ. Short term and 10-year benchmark yields have been changed multiple times in an effort to limit BoJ market intervention, but still maintain control. The BoJ is able to intervene in JGB markets whenever it deems necessary, but must wield the power carefully to maintain credibility.

Table of BoJ YCC Policy Band Changes

Date	Duration Target	Policy Announcement (link)	New Band
2016, Sept. 21st	10Y // OCR	link,	-0.1% / +0.1% // NA / -0.1%
2018, July 31st	10Y	link (page 5 – or search ‘2018’)*	-0.2% / +0.2%
2021, March 19th	10Y	link, link	-0.25% / +0.25%
2022, Dec. 20th	10Y	link, link	-0.5% / +0.5%
2023, July 28th	10Y	link, link	-0.5% / +1.0%
2023, Oct. 31st	10Y	link, link	NA / +1.0% + ?
2024, March 19th	OCR	link, link	0.0% / +0.1%
2024, July 31st	OCR	link, link	NA / +0.25%

Time to explore the original question:

Under what circumstances does the BoJ change their YCC bands? Does the BoJ adjust YCC when interest rates are near the stated limits, or do they make sure yields are well below these limits before it makes an adjustment?

We have eight key YCC policy dates, with seven being hikes. It’s easy to simply add these hike dates to a chart and visually see what the 10-year was doing beforehand (Chart 4).

Ok – looks like they generally hike when yields have been threatening their upper limit as imposed by the BoJ’s YCC policy. Nothing special here.

The Overnight Index Swap (OIS), which was referenced earlier, is worth looking at too. This financial product is probably best explained by Investopedia. While it can be hard to get your head around – the key aspect of it is that short term interest rates are swapped for longer term ones, with terms being set by the market.

When half the swap is 10-year JGBs, and the normal 10-year JGB market is distorted by BoJ YCC policy, the 10-year rate of the open market swap can be quite different from manipulated 10-year rate. This is visible in Chart 3.

When the purple OIS rate breaks the BoJ’s YCC cap, yields eventually were raised. This is evidence that the BoJ can only do so much to control markets. There are always available actions to market participants, that if taken with enough volume, will force policy change. A higher rate on 10-year OISs is one of them it appears.

OIS Data Today

OIS data is hard to find, unfortunately. Chart 3 only goes through the beginning of 2024, and I’m too poor for a Bloomberg Terminal, so this is what we have:

On January 13th, 10-year JGB yields were at 1.19%. This is five basis points higher than the reported OIS data by MacroMicro.

It is unclear where the line in the sand for the BoJ is on 10-year yields. Given that, we can’t point to a precise time that OIS spreads ‘break’ above the YCC cap. With OIS rates just getting back to where they were at the end of 2023 they don’t appear to be flashing a warning sign, yet.

In the end, we don’t know when the BoJ will raise rates next, or what yield gets them in a tizzy. We know that the 15th of January was a scheduled ‘outright purchase of JGBs’ date, as it is announced ahead of time by the BoJ. This is almost certainly the reason for yields dropping from 1.26% –> 1.20% on the 16th (US EST).

Are we in open market operation territory and will there be clarity on the upper YCC band for the 10-year at the next policy meeting on January 22nd? My hunch is yes to one or the other, but only time will tell.

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