The Japanese Yen, Bonds, Yield Curve Control, QE, the BoJ & the Japanese Economy – section (a)

This mini series is focused on the Japanese Economy.

The situation in Japan is pretty parlous at present.

The Japanese Yen has lost a lot of value in recent times. If you look at a chart for the Yen Dollar pairing, this decline becomes very apparent. It’s been in steady decline for about two years, but ever since March of this year, there’s been a very steep decline.

Why is this happening? Well, there are several aspects to this. I will do my best to break it down and explain the situation, but one of the main things to consider is Yield Curve Control.

So, let’s look at this.

Yield Curve Control
The Japanese Central Bank, the Bank of Japan (the BoJ) has been engaged in a policy of Yield Curve Control (or YCC). This sounds complicated, but really, it isn’t all that difficult to understand. Yield Curve Control is basically the Central Bank and Government trying to control the interest rates, or the yields on Government Bonds.

The Japanese Central Bank has been aiming to keep the 10 year Bond yields at as near zero as is possible. They allow for a range because they obviously don’t have complete control over all aspects of the Japanese economy. The range they have set is a quarter of a percent (or 25 basis points) to the plus side, or to the minus side of zero.

Government Bonds
Let’s look at Government Bonds. For anyone listening who doesn’t know, a Bond is a Government issued security. Bonds can be thought of glorified I.O.U.s sold by Governments to Investors.

The Government has to pay back the stated sum on the Bond, the Principal, plus the Interest by the time the Bond matures, or payment is due. Needless to say perhaps, but, a 10 year Bond matures in 10 years. There are different maturity dates for Bonds. 2 years, 5 years, 10 years and 30 years. Short term Bonds, with terms of one year or less, are known as Treasury Bills, or T Bills.

Bonds are good for Governments because they are the means by which Governments can raise funds and they are good for Investors because Investors gets a guaranteed rate of return on their investment. What is more, seen from an Investor point of view, Bonds are considered relatively safe, because it’s rare that a Government fails.