Bank of Japan plans to end yield curve control and shrink its balance sheet as inflation stabilizes at 2%
The Bank of Japan is signaling a transition away from yield curve control YCC and toward reducing its balance sheet once inflation shows a clear path to stabilizing near the 2 target. The statements are tied to remarks attributed to Governor Kazuo Ueda and have been described in media reports as a turning point for Japan’s monetary policy stance.
Officials indicated that when there is a reliable forecast that inflation will hold at the 2 target level the bank will discontinue YCC and begin shrinking the balance sheet. The idea is to move from a policy framework that keeps long term rates anchored to a more conventional stance that gradually reduces the central bank’s asset holdings.
Under its existing yield curve program the central bank has maintained a short term policy rate near zero and has set the 10 year government bond yield around a near zero level. The aim has been to support economic activity while managing financial conditions through interest rate guidance and large-scale asset purchases.
Governor Ueda highlighted that the inflation outlook carries uncertainties. A key question remains whether wage growth will persist and whether any uptick will spread to workers in smaller firms. The path of wage settlements is viewed as a critical driver for sustaining price momentum in the economy.
There have been notable wage increases in the corporate sector in recent months. In particular, major manufacturers have announced meaningful pay raises as a way to bolster consumer spending and living standards. These wage moves are being watched closely for their potential to reinforce inflation dynamics.
Japan’s inflation rate reached a multi decade high in early 2024 with figures echoing a level not seen in decades and prompting discussion among policymakers about the durability of price growth and the appropriate pace of policy normalization. The broader assessment continues to balance the need to ensure price stability with the risks of a sharper tightening path for growth and employment.
Analysts note that the policy transition would not occur abruptly. Any shift away from YCC and the pace of balance sheet reduction will be guided by data on inflation momentum, wage dynamics, and the overall economic outlook. The central bank is likely to emphasize transparency and conditional guidance as it recalibrates its framework to align with evolving macroeconomic conditions. This evolving stance is shaping expectations across financial markets and among households alike, as they adjust to a clearer horizon for monetary policy.
Observers are preparing for gradual changes that reflect the central bank’s commitment to achieving its inflation target while avoiding shocks to financial conditions or growth. The unfolding strategy remains a focal point for investors, policymakers, and researchers monitoring the trajectory of Japan’s post pandemic economy. [Cited: Kazuo Ueda remarks; Kyodo News coverage of wage developments, 2023-2024]