The monetary policy of the BOE changed at the September 2016 Monetary Policy Meeting, when the central bank conducted a comprehensive assessment of the Japanese economic activity and prices as well as the policy effects since the introduction of quantitative and qualitative monetary easing (QQE). Based on its findings, the BOJ decided to introduce the “QQE with Yield Curve Control,” a new programme for strengthening monetary easing.
The new policy framework consisted of two components: the first was “yield curve control” in which the BOE controlled short-term and long-term interest rates through market operations; the second was an “inflation-overshooting commitment”, in which the BOJ committed itself to expanding the monetary base until the year-on-year rate of increase in the observed CPI would have exceeded 2,0% and stayed above the target in a stable manner.
1. QQE was introduced in April 2013 and it has brought about improvements in Japanese economic activity and prices, mainly through the decline in real interest rates, and pushed Japan’s economy out of deflation, in the sense of a sustained decline in prices. With this in mind, yield curve control, in which the BOJ seeked a decline in real interest rates by controlling short-term and long-term interest rates, has been placed at the core of the new policy framework.
The previous experience with the negative interest rate policy, introduced in January 2016, showed that a combination of the negative interest rate on current account balances at the BOJ and purchases of Japanese government bonds (JGBs) was effective for yield curve control. In addition, the BOJ decided to introduce new tools of market operations, such as fixed-rate purchase operations, to facilitate smooth implementation of yield curve control.
2. The BOJ introduced an inflation-overshooting commitment, under which it continued expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) would have exceeded 2,0% and stayed above the target in a stable manner. Through this commitment, the BOJ enhanced its credibility of achieving the price stability target of 2,0% among market operators.
With a view to persistently continuing with sustained monetary easing, the BOJ decided in July 2018 to strengthen its commitment to achieving the price stability target by introducing forward guidance for policy rates, and to enhance the sustainability of “QQE with Yield Curve Control.”