The Bank of Japan's yield curve control: A model-based evaluation

Abstract

The Bank of Japan has adopted the yield curve control (YCC) monetary policy since September 2016. While traditional monetary policies control the short-term rates, YCC tries to control and hold the 10 year Japanese government bond (JGB) yields at around zero percent. Moreover, YCC is implemented by purchases of the JGBs over any maturities. This study evaluates the effects of YCC by modifying a stochastic model proposed by Jarrow and Li (2014) [Review of Derivatives Research 17 (3), pp. 287-321]. Their model extends the Heath-Jarrow-Morton model to incorporate the effects of government bond purchases of a central bank. The model parameters are estimated using a Kalman filter technique. The empirical results reveal that YCC lowers the yield curve by 1.7553% per year.