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Bank of Japan’s Yield Curve Control Eases – Will the Trend Continue?

Posted: Wednesday, March 10th, 2021

Estimated Reading Time: 4 minutes

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The recent rise in the U.S. 10-year Treasury ignited talks of yield curve control in the United States and elsewhere. The European Central Bank (ECB) quickly dismissed the thesis, although some controversial signs existed in the market in the last couple of months.

Higher yields triggered a higher U.S. dollar. The greenback rose against the euro by about five-hundred pips since the start of the year. This comes in sharp contrast to the mega-consensus that we will see a lower dollar in 2021. In fact, even today, the market is heavily short the USD, so one should not be surprised to see further advances for the greenback.

At the same time, stocks remain elevated. After an initial correction, seen especially on the Nasdaq 100 index, the main stock market indices climbed back to the highs. In some cases (e.g., Dow Jones), the market pushed to new all-time highs.

The bar is set high. A recent survey from the research team at Deutsche Bank suggests that over $20 billion of the new stimulus money will find its way to the stock market. However, we are at an inflection point.

Higher U.S. Treasury yields led to a rise in yields elsewhere in the world. The Japanese JGB 10-year yield, or the Bund, reacted. While in the U.S., the new tightening conditions suggested by rising long-term yields are welcomed, we cannot say the same in Europe.

How about Japan?

JGB 10 Year Yield

Japan’s 10-Year Yield On the Run Higher

The last two trading days of February were marked by a stock market selloff. Triggered by rising yields, the price action led to unwanted tightening financial conditions.

US Treasury 10 Year Yield

As suggested by the chart above, the trigger came from the U.S. Treasury yield. The move higher quickly led the Japanese 10-year yield to climb to 0.17%, the highest level since 2016. What is interesting here is that the Bank of Japan (BOJ) hinted at the end of 2020 that it might be willing to let the long-term yields rising. Let us not forget that the bank instituted the yield curve control in (!) 2016, and the policy aimed at a 0% target.

But signals about the BOJ planning something appeared much earlier. In the second half of January 2021, an article on Reuters suggested that the BOJ may be willing to let long-term yields rise – one month earlier than the actual events that created a “tantrum” in financial markets at the end of February 2021.

The reaction? The JGB futures at that time gapped lower on the news, as the yield curve control became a floor, not a cap, on long-term yields.

An asymmetric yield curve control in Japan suggests higher long-term rates, which, in turn, makes the Japanese Yen (JPY) extremely weak. What did the JPY pairs do in the meantime? They all rallied – EURJPY to 130, USDJPY to 109, etc.

Yet, the Japanese real interest rates were already increasing at the time of the Reuters article. Put it simply – it is hard to ignore the JPY, should the BOJ’s yield curve control loosen further.

U.S. Treasury Rising Yield Spills Over in Europe

Just a few days after the BOJ’s signal, the central banks around the world shifted towards a slightly hawkish narrative. The end of January saw the Bank of Canada not delivering a new rate cut and instead signaling a possible taper. Moreover, the BOJ reported a wider yield curve control as soon as March 2021. Furthermore, the ECB signaled that it might not use its full PEPP envelope. Finally, even the Bank of England suggested that it will postpone its intended move to a negative rates environment.

Fast forward to the present days, and the rise in the U.S. Treasury yield keeps making victims. On the last trading day of February 2021, Isabel Schnabel, executive board member of the ECB, expressed the central bank’s concerns with the growth in yields.

German Bund Yield

She even suggested that the ECB has more room to cut interest rates. After all, the rise in real long-term rates may hurt the recovery – something the ECB tries to avoid at all costs.

One day ahead of the ECB’s March 2021 meeting, the market participants have received some conflicting signals from the central bank. On the one hand, some members of the ECB suggested that the bank will increase its PEPP purchasing. On the other hand, the weekly reports reveal no such thing.

Do we have a communication problem at the ECB, or is this just constructive ambiguity? Moreover, will the ECB remain vehement against introducing yield curve control in Europe, should the spillover from the U.S. Treasury continue?

Yield Curve Control


Yields do rise in an economic recovery – this is what they are supposed to do. It is only the pace of the move that is concerning, especially given the mega-consensus in late 2020 from the world’s largest investment banks.

To sum up, the rise in U.S. long-term rates may have interesting consequences elsewhere. First, the Bank of Japan may ease its grip on the yield curve control. Second, the ECB may be forced to do just the opposite.

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