History of Japan's Monetary Policy
Evolution of BOJ policy from the bubble era through ZIRP, QE, and YCC
A Timeline of BOJ Policy and its JGB Market Impact
The history of the Bank of Japan's (BOJ) monetary policy is a history of fighting deflation. For nearly three decades, the BOJ has been a global pioneer in unorthodox policies, from zero interest rates to quantitative easing. Understanding these major shifts is essential to understanding the JGB market.
The JGB market did not evolve in a vacuum; it was the primary tool used by the BOJ to conduct these policies. The yield curve, in turn, became less of a market indicator and more of a policy target.
| Era / Policy Date | Prime Minister | BOJ Governor (総裁) | Policy / Common Name | Policy Target | Policy Rate / Tool | BOJ Action (The Change) | JGB Market Impact / Yield Curve |
|---|---|---|---|---|---|---|---|
| 1989 - 1990 | Toshiki Kaifu | Yasushi Mieno | Bubble Bursting | Asset Prices / Credit Growth (Implicit) | Official Discount Rate | Aggressively hiked the official discount rate from 2.5% to 6.0% in just over a year to pop the massive real estate and stock bubble. | The yield curve inverted sharply as short-term rates were forced above long-term rates. This choked off credit and triggered the "Lost Decades." |
| Feb 13, 1999 | Keizo Obuchi | Masaru Hayami | Zero Interest Rate Policy (ZIRP) | Interest Rate | Uncollateralized Overnight Call Rate | Innovated by cutting the overnight policy rate (the *mutan*) to 0%, a world first for a major central bank. | The "front end" (short-term) of the yield curve was permanently anchored at 0%. This forced investors to buy longer-term JGBs, pushing the 10-year yield down. |
| Aug 11, 2000 | Yoshiro Mori | Masaru Hayami | Premature Exit | Interest Rate | Uncollateralized Overnight Call Rate | Believing the economy (aided by the "dot-com" bubble) was recovering, the BOJ controversially hiked its policy rate from 0% to 0.25%. | The market immediately priced this as a policy error. The economy faltered, and the BOJ was forced to reverse course within months, damaging its credibility. |
| Mar 19, 2001 | Junichiro Koizumi | Masaru Hayami | Quantitative Easing (QE) | Quantity (Bank Reserves) | Current Account Balances (CABs) | Abandoned targeting interest rates and instead targeted the *quantity* of bank reserves (CABs), committing to buy JGBs until the target was met. | The BOJ became a major, consistent buyer of JGBs. This new, massive demand pushed long-term yields down. The 10-year yield fell below 1.0% and stayed there. |
| Mar 9, 2006 | Junichiro Koizumi | Toshihiko Fukui | Exit from QE/ZIRP | Interest Rate | Uncollateralized Overnight Call Rate | Ended QE. It followed this by hiking its policy rate to 0.25% in July 2006 (a second "false dawn"). | The yield curve shifted up (a "bear shift"). The 2008 Global Financial Crisis hit soon after, proving the exit was premature and forcing the BOJ back to zero. |
| Apr 4, 2013 | Shinzo Abe | Haruhiko Kuroda | Quantitative & Qualitative Easing (QQE) | Quantity (Monetary Base) | Monetary Base / JGB Purchase Rate | "Kuroda's Bazooka." A shock-and-awe campaign to hit 2% inflation. Shifted to a massive JGB purchase *rate* (¥50T/year, later ¥80T) and buying riskier assets (ETFs, REITs). | JGB yields collapsed across the *entire* curve. The BOJ's purchases were so large they began to dominate the market, crushing liquidity and volatility. |
| Jan 29, 2016 | Shinzo Abe | Haruhiko Kuroda | Negative Interest Rate Policy (NIRP) | Interest Rate (Short-term) | Complementary Deposit Facility Rate | As QQE's effects faded, the BOJ applied a -0.1% interest rate on a portion of commercial bank reserves. | A profound shock. JGB yields plunged *below zero* for the first time. The 10-year yield turned negative, meaning investors were paying to lend to Japan. |
| Sep 21, 2016 | Shinzo Abe | Haruhiko Kuroda | Yield Curve Control (YCC) | Yield Curve (Short & Long Rates) | 1. Short-term Call Rate 2. 10-year JGB Yield |
Abandoned the *quantity* target (¥80T) and introduced a *price* (yield) target.
1. Short-term rate: -0.1% 2. Long-term rate: 10-year JGB yield at "around 0%" (±0.10% band). |
The 10-year JGB yield became locked at 0%. This killed volatility. The curve took on a bizarre shape: negative at the short end, 0% at 10 years. |
| Dec 2022 - Oct 2023 | Fumio Kishida | H. Kuroda / K. Ueda (from Apr '23) | YCC "Flexibilization" | Yield Curve (Long-Rate Flexibility) | 10-year JGB Yield (Band) | As global inflation surged, the BOJ was forced to "tweak" its peg to relieve pressure:
• Dec '22: Widened band to ±0.50% • Jul '23: Made 0.50% "flexible," offered to buy at 1.0% • Oct '23: Abandoned the 1.0% hard cap |
Volatility returned. Yields spiked to the new limit at each meeting. The curve began a "bear steepening" as the market priced in the end of YCC. |
| Mar 19, 2024 | Fumio Kishida | Kazuo Ueda | The "Pivot" / End of Unorthodoxy | Interest Rate (Short-term) | Uncollateralized Overnight Call Rate | Citing stable 2% inflation and strong wage growth, the BOJ ended its entire unorthodox framework:
1. Ended YCC 2. Ended NIRP (first hike in 17 years, to 0.0-0.1%) 3. Ended ETF/REIT purchases |
The JGB market was "set free." The yield curve is now determined by market forces, not a BOJ peg. Yields shifted higher across the curve. |
| Jan 24, 2025 | Sanae Takaichi (from Oct '25) | Kazuo Ueda | Normalization Continues | Interest Rate (Short-term) | Uncollateralized Overnight Call Rate | The BOJ raised rates by 0.25% to 0.50%, the highest level since 2008. Governor Ueda signaled intention to continue raising rates if economic and price outlook is realized, stating the Bank will "adjust the degree of monetary easing as needed." | 10-year JGB yields rose toward 1.0-1.5% range as markets priced in continued normalization. Volatility remained elevated as the BOJ signaled a data-dependent approach to future hikes. |
| Jul 31, 2025 | Sanae Takaichi | Kazuo Ueda | Pause & Assessment | Interest Rate (Short-term) | Uncollateralized Overnight Call Rate | The BOJ held its policy rate steady at 0.50% amid global uncertainties and to assess the impact of previous hikes. Core inflation forecast raised to 2.7% for fiscal 2025, up from 2.2% in April. | JGB yields stabilized as markets awaited further guidance. The yield curve maintained its upward slope, with 10-year yields trading in the 1.5-1.7% range, reflecting expectations of gradual future tightening. |
📌 Deep Dive: Abenomics and Yield Curve Control (YCC)
The period from 2013-2024 under "Abenomics" represents the most aggressive and sustained monetary experiment in modern history. Understanding this era is critical for JGB market participants.
Abenomics "Three Arrows" (2013):
- Arrow 1: Aggressive monetary easing (QQE)
- Arrow 2: Flexible fiscal policy
- Arrow 3: Structural reforms
The BOJ's role was to deliver on Arrow 1. Kuroda's appointment in 2013 brought a new philosophy: overwhelming force. Rather than incremental easing, the BOJ would shock markets with its scale and commitment.
QQE's Market Distortion (2013-2016):
By purchasing ¥80 trillion in JGBs annually (equivalent to ~15% of GDP), the BOJ became the dominant buyer. This created severe side effects:
- Liquidity drought: Dealers couldn't source bonds to sell—bid-offer spreads widened
- Volatility collapse: With the BOJ as guaranteed buyer, price discovery failed
- Scarcity premium: On-the-run JGBs traded at negative yields even before NIRP
Yield Curve Control (2016-2024):
YCC was revolutionary because it abandoned quantity targets (buying ¥X trillion) in favor of a price target (10-year yield at 0%). This meant:
- The BOJ would buy unlimited JGBs if needed to defend the 0% level
- Market participants couldn't fight the BOJ—shorting JGBs became a losing trade
- The yield curve became "administratively set" rather than market-determined
Why YCC Lasted So Long:
Despite global inflation surging in 2021-2022, the BOJ maintained YCC because:
- Inflation composition: Japan's inflation was driven by imported energy costs, not domestic demand
- Wage stagnation: Without wage growth, the BOJ feared premature tightening would kill recovery
- Debt sustainability: With government debt at 260% of GDP, rising yields risked fiscal crisis
The Exit (2024):
When the BOJ finally abandoned YCC in March 2024, it marked the end of an era. For the first time in eight years, JGB yields could move freely. The immediate impacts:
- Yield curve steepening: 10-year yields rose from 0% to 0.7-1.0% range
- Volatility return: Daily yield moves of 5-10bp became normal (vs. <1bp under YCC)
- Portfolio rebalancing: Japanese institutions (banks, insurers) faced massive duration risk as yields rose
- IRRBB concerns: Banks scrambled to hedge interest rate risk that had been dormant for years (IRRBB refers to Interest Rate Risk in the Banking Book, a key regulatory topic)
The lessons from Abenomics and YCC are still being studied. For JGB traders and risk managers, this period demonstrated that central bank intervention can eliminate market risk temporarily—but at the cost of massive adjustment when policies normalize.
References
The policies and market dynamics described are based on official publications and reports from the Bank of Japan and the Ministry of Finance.
- Bank of Japan. "Functions and Operations of the Bank of Japan." Available at: https://www.boj.or.jp/en/about/outline/data/fobojall.pdf.
- Japan Ministry of Finance. "Debt Management Report." Available at: https://www.mof.go.jp/english/policy/jgbs/publication/debt_management_report/index.html.
- Bank of Japan. "Changes in the Monetary Policy Framework." (Press Release, March 19, 2024). Available at: https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2024/k240319a.pdf.