Since the Global Financial Crisis (GFC), central banks have relied on experimental monetary policies. However, these policies have more of an impact on financial markets rather than economic fundamentals. Asset prices have been driven higher to the point where valuations for global equities, fixed income and housing markets are at or near record highs. Quantitative Easing (QE) had become the tool of choice for most global central banks needing to promote economic growth and inflation when lower interest rates have failed. Unfortunately, QE has not been as successful as hoped in achieving its key objective. Global growth has slowed and price inflation remains well below target in the vast majority of developed nations. We may now be at an inflection point. The Bank of Japan’s (BoJ) September meeting was a key turning point in central bank policy where it changed its monetary framework from targeting the monetary base to focusing on yield curve control. Under its new policy framework, the BoJ will buy and sell long-term bonds in order to keep the 10-year bond yield at 0%. This means that if 10-year government bond yields fall below 0%, the BoJ will actually have to sell bonds rather than buy them, which effectively amounts to quantitative tightening, not easing.
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