BoJ published minutes of the December 19-20 meeting today, where the 10-year JGB yield cap was raised from 0.25% to 0.50%.

“Many members noted that there was a distortion in the price formation of 10-year bonds, and that the functioning of bond markets had deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets,” the minutes said.

“Members concurred that, with regard to the conduct of yield curve control, the measure to expand the range of 10-year JGB yield fluctuations to between around plus and minus 0.5 percentage points from the target level, while significantly increasing the amount of JGB purchases, was appropriate.”

Meanwhile, government representatives requested to adjourn the meeting after the discussions. They’re probably surprised by the agreed adjustment to YCC. The meeting was adjourned from 10:51 a.m. to 11:28 a.m. before concluding at 11:54 a.m.

Full minutes here.

Addressing the parliament today, BoJ Governor Kazuo Ueda articulated the rationale behind this week’s exit from the long-standing negative interest rate policy and the subsequent rate hike. This move marks a significant shift for Japan’s monetary policy, which had been entrenched in a negative interest rate environment for eight years.

Ueda pointed out, “We could have waited until inflation is completely at 2% for a long period of time. But if we did so, it’s unclear whether inflation would have stayed at 2%. We might have seen a sharp increase in upside price risks,” highlighting the preemptive nature of the BoJ’s action.

The decision was influenced by recent trends in service prices and substantial wage increases resulting from annual wage negotiations, indicating a strengthening cycle of wage growth and inflation in Japan.

Despite this historical step, Ueda underscored that Japan’s inflation expectations for the medium and long term are “still in the process of accelerating towards 2%”. He assured that BoJ remains committed to supporting the economy and prices “by maintaining accommodative monetary conditions for the time being”.

He also hinted at future adjustments, stating, “As we exit our massive stimulus program, we will gradually shrink the size of our balance sheet and at some point reduce the size of our government bond buying.”

BoJ Governor Haruhiko Kuroda said the central bank’s ETF buying is not distorting the Tokyo stock market. “We are buying ETFs as part of a comprehensive monetary easing framework. We have no plans now to end the framework or our ETF purchases,” he said.

“The frequency of our ETF buying has fallen sharply recently, as well as the size of each purchase,” Kuroda said. “We’re buying flexibly looking at market developments.”