The Bank of Japan is set to keep monetary policy steady on Tuesday and seek to allay speculation of an early tapering of its massive stimulus, as recent bond market turbulence puts to the test its revamped policy framework that aims to control the yield curve.
Japanese government bond yields spiked last week after the BOJ skipped a much-anticipated auction to buy short-term debt on Wednesday, leaving investors wondering about its intentions and casting doubt on its resolve to cap bond yields. Two days later, it surprised markets again by increasing bond purchases.
The BOJ says such adjustments to its market operations are aimed at getting markets accustomed to a decision it made last September, which was to shift its policy focus to interest rates from the pace of bond buying, sources say.
The central bank was forced into making the policy revamp after more than three years of aggressive bond buying failed toaccelerate inflation to its 2 percent target.
But the new framework, dubbed "yield curve control" (YCC), has brought in new challenges. With markets accustomed to huge bond buying by the BOJ, any sign of slowdown in its purchases has heightened market volatility and prompted market speculation it could withdraw stimulus earlier than expected.