Not Even Goldman Has Any Clue How The BOJ Will “Control” The Yield Curve
The biggest news overnight, and certainly far bigger than this afternoon’s non-event from Janet Yellen, was the significant change in monetary policy announced by the BOJ which (belatedly) unveiled its re-revised “QQE”… this time “with Yield Curve Control” (or “QQEWYCC“), a phrase used in lieu of “Reverse Operation Twist”, whereby the BOJ is hoping to steepen the yield curve and undo the damage it itseld created in January when it introduced NIRP for the first time to Japan, without doing much of anything else.
While we laid out the theoretical big picture elements of QQEWYCC both earlier, and two weeks ago, there is a small problem when one gets into the practical nuances of the proposed monetary experiment: nobody really knows how it will work, not even Goldman Sachs, whose BOJ expert Naohiko Baba admitted that he has no clue how the BOJ will actually execute its vision.
Confirming that the “JGB market has become increasingly distorted”, Baba says that
“it is very unclear at this time exactly how the BOJ intends to “control” the yield curve in the future. Based only on the official statement, we think it is likely it will maintain the yield curve at more or less the current level for the time being. However, the question is how it will control the overall level and shape of the curve when financial and economic conditions change in the future. While the JGB market needs to take time to study the BOJ’s intentions, with interest rate movements lessening, we think the pricing function of interest rates as a mirror reflecting real economic and financial conditions will be increasingly lost.”
Ah yes, the old problem with nationalizing a market – whether it’s bonds or stocks – is that it is no longer, by definition, a market but merely a policy tool which has ceased to delivers any informational value whatsoever.
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