Normalisation post-YCC
Part of the process, ending BoJ long duration dominance
Normalisation: the hard part
The BoJ has been in normalisation mode since 2023 when current Governor Ueda assumed the helm. Ueda will complete his 3rd year in office this April. His first year was marked by announcing a full monetary policy review of the past 25 years, in particular, seeking a net assessment on benefits of unorthodox policies. The policy he spent no time eliminating (without waiting for the review to be concluded) was yield curve control (YCC).
On 28 July, 2023 the BoJ increased flexibility of YCC by raising its intervention ceiling to 1%. On 31 October, it eliminated the 1% ceiling and declared it a reference point. Nevertheless, the BoJ intervened the next day at 0.97% to ensure the market understood that this was not a signal for yields to move decisively above 1%. It then took until May 2024 before 10Y JGBs finally tested the psychological 1% threshold (first time in 11 years).
Between May 2024 and May 2025 10Y JGBs rose steadily to 1.60% without a protest or need for intervention to manage the curve. Rising 10Y yields were more or less orderly and without need for intervention or smoothing. The problem emerging, however, was in Superlongs (>10Ys).
With new solvency rules taking effect in FY25, life insurance cos had been aggressive buyers of long duration in FY24. Having reached their ALM targets in advance, Lifers stepped away from the Superlong market in Q2-25. This produced the first disruptive spike in long-term JGBs when global bond market term premia rose post-Trump Liberation Day.
