Bank of Japan Adopts Flexible Approach to Yield Curve Control with Implications for the Japanese Yen Bank of Japan Adopts Flexible Approach to Yield Curve Control with Implications for the Japanese Yen Bank of Japan Adopts Flexible Approach to Yield Curve Control with Implications for the Japanese Yen

Bank of Japan Adopts Flexible Approach to Yield Curve Control with Implications for the Japanese Yen

Forex 7 minutes to read
Redmond Wong

Market Strategist, Greater China

Summary:  The Bank of Japan (BoJ) maintained its yield curve control (YCC) target for 10-year Japanese Government Bonds with a range of plus and minus 50 basis points around zero at the July monetary policy meeting. However, it introduced a more flexible approach, allowing deviations from the target range and setting a 1% cap on the maximum rise in the 10-year JGB yield. The BoJ retains discretion for bond buying between 0.5% and 1%. Market confusion ensued, but the BoJ's gradual departure from the YCC policy indicates potential implications for the Japanese Yen's strength and USDJPY exchange rate.

Bank of Japan's July Monetary Policy Meeting

In a highly anticipated monetary policy meeting, the Bank of Japan (BoJ) decided to maintain its yield curve control (YCC) target, keeping it in a range of plus and minus 50 basis points (0.5 percentage points) from zero percent on the 10-year Japanese Government Bonds (JGBs). However, what caught the attention of market participants was the central bank's announcement of a significant shift in its approach, signaling greater flexibility and introducing the possibility of tolerating deviations within an unspecified extent.

BoJ's Shift in Policy Approach

Gone are the days when the BoJ adhered strictly to rigid limits for the YCC target range. Instead, it has adjusted its policy that the upper and lower bounds of the YCC target range are now mere reference points. The central bank tweaked its long-held YCC policy to give itself newfound flexibility and leeway to maneuver its monetary policy in response to prevailing economic conditions.

BoJ's New Bond Buying Arrangement

One concrete step taken by the BoJ to demonstrate this shift away, particularly from the upper bound, is the introduction of a hard stop on the maximum rise in the 10-year JGB yield at a much higher level of 1%. The central bank will now offer to purchase 10-year JGBs at a rate of 1% every business day through fixed-rate purchase operations, effectively capping the maximum increase in the 10-year JGB yield at 1%.

Cross the River by Feeling the Stones

This move, however, gives the BoJ the discretion to intervene in bond buying between 0.5% and 1%, depending on its assessment of the then-prevailing economic landscape and market conditions. The BoJ apparently is cautious in exiting the YCC completely as it notes in its Statement on Monetary Policy that “sustainable and stable achievement of the price stability target of 2 percent, accompanied by wage increases, has not yet come in sight.” The BoJ says that it will continue to do quantitative easing (QE) “until the year-on-year rate of increase in the observed CPI (all items less fresh food) or core CPI exceeds 2 percent and stays above the target in a stable manner”.

In its Outlook for Economic Activity and Prices (July 2023), the median forecasts from the Policy Board Members on the CPI (all items less fresh food) for the fiscal year ending March 2024 was revised down to +1.9% from +2.0% (forecast made in the Outlook in April) and the forecast for the fiscal year 2025 stayed at +1.6% (Figure 1), both below the +2% target.

Figure 1. BoJ's Projections for Core CPI; Source: Outlook for Economic Activity and Prices (July 2023)

Forex Market Reaction

The initial reaction in the forex market was one of confusion about the message sent by an unchanged target range and the BoJ's discretion to maneuver long-term interest rates between 0.5% and 1%. It resulted in choppy swings of USDJPY between 141 and 138 within the first hour of trading after the policy announcement. Adding further to the confusion, BoJ Governor Ueda downplayed the significance of the changes and insisted that the policy shift was not a step toward the normalization of monetary policy.

Interpretation and Market Impact

Nonetheless, we believe that the BoJ's actions today signal a gradual departure from the YCC policy framework. While Governor Ueda's remarks calmed the forex market and brought the USDJPY back to 139.40, flat to its closing level last night in New York (Figure 2), the central bank appears to be taking a measured and controlled approach towards potentially abandoning the YCC policy.

Figure 2. Initial movement of USDJPY after the BoJ policy announcement; Source: Bloomberg, Saxo

As the BoJ moves away from strict YCC target limits and embraces a more adaptable stance, the Japanese Yen could witness strengthening trends while traders and investors direct their focus onto the increasing likelihood of the beginning of a new policy direction towards completely exiting the YCC under Ueda. When this rethinking of the timetable of the BoJ normalizing policies picks up momentum, it may leave the path wide open for USDJPY to test the downside.

Figure 3. Summary of BoJ's YCC policy; Source: Bank of Japan

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.