IMF says more flexible BOJ yield control can prevent sharp market reaction

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan could help prevent abrupt policy changes later by allowing more flexibility in its bond yield curve control, the International Monetary Fund said in its global financial stability report released on Tuesday.

Under yield curve control (YCC), the BOJ guides the 10-year government bond yield around 0% as part of efforts to sustainably achieve its 2% inflation target.

The central banks decision in December to widen the tolerance band around the yield target has heightened market bets of a further near-term tweak or end to YCC.

Changes to the BOJs yield control policy may affect financial markets through exchange rates, term premiums on sovereign bonds and global risk premiums, the IMF said.

“While allowing more flexibility in the yield curve control policy could have some repercussions in global financial markets, such a change not only is warranted to meet monetary policy objectives but could also help prevent abrupt policy changes later that could trigger larger spillovers,” the IMF said in the report.

(Reporting by Leika Kihara; Editing by Shri Navaratnam and Sam Holmes)