Ex-Fed’s Bernanke: BOJ decision to target 10-yr JGB yield was most surprising

Former Federal Reserve (Fed) Governor Ben Bernanke shared his take on the latest Bank of Japan’s (BOJ) decision, in a piece for the Brookings Institution.

Key Quotes:

Market reactions to the BOJ’s announcements have been mixed, likely because the announcements were about a change in policy framework, not a change in policy stance per se. 

As the BOJ noted explicitly, the Bank will now be able to cut either the short-term rate or its target for the longer-term JGB yield if future policy easing is needed.

The follow-through will indeed be crucial: Japan has made significant progress toward ending deflation, but that progress could still be lost if the public questions the BOJ’s commitment to its inflation objective.

The commitment to overshoot the inflation target will be constructive if it helps to kill market speculation that the BOJ was contemplating abandoning its fight.

The most surprising, and interesting, part of the announcement was the decision to target the ten-year JGB yield. Targeting a long-term yield is closely related to quantitative easing.

In a quantitative easing program, the central bank specifies the quantity of financial assets (such as government bonds) that it plans to buy, leaving the price of those assets (the yield, in the case of bonds) to be set in the market.

Pegging a long-term yield, as the BOJ now plans to do, amounts to setting a target price rather than a target quantity. 

Read full article here