The Bank of Japan could risk taking a step backwards in terms of its policy communications if it decides today to discuss letting long-term interest rates rise above its 0.5% cap by “a certain degree,” as was reported by the Nikkei.

The BOJ still officially targets the 10-year yield to be 0%, as it has since 2016. Initially there was no clear trading band around that, although it became clear over time that the central bank was allowing bonds to trade in a band +0.1%/-0.1% around the target. In 2018 former Governor Haruhiko Kuroda formalized the band, it was subsequently lifted and added to the policy statement.

But if the BOJ was to do as the Nikkei story suggests, the top end of the band would be kept at 0.5% but yields would be allowed to rise above that.

So you’d have an official target at 0% (which is effectively ignored), an official ceiling at 0.5% (which the BOJ could then ignore or defend if they felt like it), and a new unofficial ceiling somewhere higher still.

That’s not a model of policy clarity. What might make more sense is — eventually — letting the 0% interest rate yield target rise and officially exiting its negative-rate policy, rather than tinkering in an opaque way that could lead to market confusion and volatility.

“It needs to officially let rates rise, not to invite attack from speculators by promising to ignore its own targets, in the way yesterday’s Nikkei suggested,” said CLSA strategist Nicholas Smith.

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--With assistance from Winnie Hsu.