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Increasing doubt over Yield Curve Control’s longevity

In less than two months, we should know who will replace Bank of Japan Governor Kuroda Haruhiko, whose term ends on 8th April. Whoever replaces him will be under increasing pressure from the government to abandon Yield Curve Control (YCC), which has an interest in bringing down inflation to shore up its approval rating. What’s more, bond market function according to bond dealers is at its worst ever, and the Bank’s decision to manage yields of maturity ranges other than 10 years as part of YCC threatens to stifle the bond market further.

Finally, there’s also been a shift in tone among the Board, with several members now seeing “strong momentum” behind the recent rise in consumer prices. That’s probably not enough to convince them to raise the policy rate, especially when the economy is likely to be in recession when the new governor assumes office. But the bar to abandoning YCC is much lower. If the Bank does jettison YCC, we expect to see a faster fall in inflation than we currently expect, as the yen is likely to appreciate more sharply in response.

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