The Evolution of Monetary Policy Focal Points

With near-zero policy rates becoming the norm in many advanced economies, the focus on long-term bond yields has strengthened considerably. The unconventional monetary policy decision by the Bank of Japan (BOJ) in September 2016 to explicitly target the ten-year Japanese government bond (JGB) yield institutionalized this process—by effectively creating a new monetary policy focal point. In this article, we study the importance of such focal points. Empirically, we also investigate how JGB benchmark maturities ranging from one to thirty years has affected other benchmark maturities over time. We find that the ten-year bond, indeed, became more influential in 2016. However, the effect was surprisingly short-lived. The results suggest that once financial market participants anchored their expectations of the ten-year JGB yield to the new BOJ target, the attention merely shifted towards even longer maturities. Contrary to the logic of the monetary transmission mechanism, we also find the short end of the yield curve has been an absorber, rather than transmitter, of influence during the last decades.