10 to 16 October: Easy Peasy Japanesey

At their last meeting, the Bank of Japan made two policy innovations:

1. “Yield Curve Control” whereby the bank will aim to hold the 10yr yield at 0%, inducing a steep curve and allowing base rates to fall further into negative territory (whilst mitigating the tax on banks).
2. Effectively raising the inflation target by saying it was prepared to “over-shoot” the 2% level.

We think these measures may have a greater impact on global markets than initially appreciated. First, the adjustment to QE implementation has heightened concerns that this tool is reaching the end of its useful life. This week’s ECB meeting may reveal Europe’s take. Second, Japan’s move on the inflation target may start the long discussed move towards tolerating a higher level of inflation as a way of managing the interest rate lower bound. Last week Mark Carney (Governor of the Bank of England) also spoke about a willingness to “over-shoot”. So far this month US, German and UK 10-year yields have risen 17,18 and 37bps respectively as investors consider the sustainability of current policy.

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