TOKYO: Central banks’ battle with the global financial crisis showed they could exert a “considerable” impact on long-term interest rates even under today’s highly developed financial markets, a senior Bank of Japan official said on Wednesday. But more research is needed on how to pin down the desirable shape of the yield curve and to what extent central banks can control long-term interest rates, said Masayoshi Amamiya, the BOJ’s executive director overseeing monetary policy. “What we learned from various practices of monetary policy implementation and existing empirical studies is that the central bank can bring about a sizable effect on long-term interest rates,” Amamiya said in a speech at a seminar. “There are areas where further understanding is called for, such as controllability of interest rates or their effectiveness as a measure to tackle adverse shocks.”
The BOJ has been studying for the past two years how to measure the desirable shape of the yield curve, though research on this has yet to be completed, Amamiya said. “Assessing the entire yield curve is a process of complicated and comprehensive evaluations that need to consider broad areas,” he added. After more than three years of heavy money printing failed to accelerate inflation to its 2 percent target, the BOJ revamped its policy framework in September to one that guides short-term rates at minus 0.1 percent and 10-year bond yields around zero percent.
The new framework, dubbed “yield curve control” (YCC), has been put to test as expectations of inflation-inducing policies by incoming U.S. President Donald Trump pushed up global bond yields, including those of Japan’s. One of the most influential bureaucrats in the BOJ, Amamiya is regarded as having played a key part in crafting many of the central bank’s unconventional monetary policies including its quantitative easing program and YCC. Amamiya defended YCC, saying that it has been exerting its intended effects thanks to favorable global market conditions such as rising stock prices and a weak yen. He also said unconventional monetary policies undertaken by major central banks during the global financial crisis in 2008 showed that they can lower long-term rates significantly through aggressive purchases of government bonds. But Amamiya stressed the challenges of the BOJ’s new policy framework, such as uncertainties on how much it can control the longer end of the yield curve. “It is a novel and unprecedented policy globally because … it is explicit in its aim to control the long- and short-term interest rate system as a whole.”
