Japan has long struggled with growth, since the 'lost decade', the deep recession that the country went through in the 90s, Japan has been struggling with falling or stagnating prices.
The Bank of Japan has practiced Keynesian, ultra-loose easy money policies since the 80s. These policies did not work as the BOJ expected, the more they tried to stimulate the economy, the less it responded. They have tried quantitative easing and negative interest rates, which led them to be the most indebted economy in the world, with a 264% debt-to-GDP ratio.
The yield curve controls are one way of keeping their monetary policy loose, even in the face of rising demand and inflation. The cap for the 10-year bond was 0.5%, but it was raised to 1% signaling an end to the YCC policy. The BOJ interest rate target for their short-term policy rate is still -0.01%. This policy change is a response to recent inflation, which turned out to be more long-lasting than the Bank of Japan expected.
The Yield control has caused the BOJ to bleed cash, as there is no point in holding the bond when there is a possibility the cap can be lifted, and it is better to sell it now. The BOJ had to buy a lot of bonds through this scheme, ballooning its balance sheet.
However, raising the cap, instead of abolishing it was a mistake in my opinion. It will now mean many more sell their bonds and bet against the bond because this move is taken as a somewhat clear signal that the cap is going to be lifted soon. This is going to cause a messy and expensive exit from the policy for the BOJ.
Source: New York Times
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