Ex-BOJ Deputy Governor Nakaso Predicts Tweak or End to YCC -Nikkei

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Former deputy governor Hiroshi Nakaso said in a Sunday newspaper interview that the Bank of Japan would likely change or end its policy of controlling bond yields due to increased side effects, such as the impact on financial institutions' profit margins.

Nakaso, in an interview published by the Nikkei, said that the massive stimulus implemented by Haruhiko Kuroda, whose tenure as governor ended this past Saturday, helped to end the deflation, but did not achieve the 2% price target of the central bank because inflation expectations were low.

He said that as a result of this, the BOJ was forced to maintain its ultra-loose monetary policy over a long period, despite the rising costs, such as the strain on the banks and the dysfunction in the bond markets.

Nakaso stated that "the increasing side effects are a sign of the policy effect" (of YCC). The BOJ's newly appointed leadership is likely to modify or eliminate yield curve control (YCC) when the time is right.

Nakaso stated that the next challenge is to stop negative interest rates, and begin a full-fledged normalisation of policy.

He said that the BOJ would need to see clear evidence of improvement in Japan's production gap and wage increases to allow it to stop its negative interest rates.

He said that the BOJ would make a decision once it confirmed the ability to sustain the momentum of 2% inflation.

As part of its efforts to achieve 2% inflation, the BOJ caps the yield on 10-year bonds at zero and guides the short-term rates around -0.1%.

The BOJ's new governor Kazuo Ueda has been tasked with modifying or ending the YCC. Inflation is above 2%, and the central banks massive bond purchases have drawn criticism as distorting the market.

Nakaso served as BOJ deputy governor from 2014 to 2018, a period of five years.