A recent surge in global interest rates is heightening pressure on the Bank of Japan to change its bond yield control next week, with a hike to an existing yield cap set just three months ago being discussed as a possibility.
Any decision to change its yield curve control will largely depend on how markets move leading up the Oct. 30-31 policy meeting, three sources familiar with the matter told Reuters, speaking on condition of anonymity due to the sensitivity of the matter.
The widening policy gap between Japan and its peers has weighed heavily on the yen, which has in turn fanned imported inflation. "Depending on market developments, it can't be ruled out," the source said on the chance of debating further tweaks to YCC this month, a view echoed by two more sources. Among ideas that could be discussed would be to raise the ceiling for the 10-year bond yield beyond 1.0%, or steps that water down the BOJ's commitment to defend a set yield level, the sources said.Given uncertainty over the outlook for global growth and next year's wage expectations, however, some in the BOJ are opposed to taking steps that would be interpreted as a move toward an exit from ultra-loose policy, the source said.
While raising the cap would allow the BOJ to avoid ramping up bond buying and dry up already thinning market liquidity, doing so could push the yield further away from the 0% target, casting doubt on the feasibility of YCC.
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