What Did the Yield Curve Control Policy Do?

This paper examines the recent experience of the Bank of Japan (BOJ) in implementing the yield curve control (YCC) in the Japanese Government Bond (JGB) market. The YCC policy started in September 2016 with targets on two interest rates with different maturity: overnight policy interest rates at -0.1% and the longer-term 10-year JGB yields at zero percent with the fixed but adjustable fluctuation allowance range. The YCC policy had been highly effective in stabilizing interest rates from short to long term at low levels, at least up to early 2022. This paper addresses the question of what the YCC policy did through the lens of the yield curve dynamics in the JGB market and the overnight index swap (OIS) market, with due consideration of practical details of the BOJ's JGB market operations. Empirical evidence shows two points. First, the BOJ's JGB market interventions amplify the fluctuations of the overall yield curves, in stark contrast to its stated policy purpose of fostering the smooth formation of a mild upward-sloping shape of the JGB yield curve. Second, the BOJ's outright JGB purchases in high-stress times are seemingly aggressive but actually reactive to counter the market pressure on the YCC cap. These findings indicate that the YCC policy was carried out to sustain the YCC policy framework without exerting effective easing effects but with significant side effects.