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QuestionCan long-term interest rates be controlled by central banks, although the conventional view is that central banks can control short-term interest rates but not long-term interest rates?

Answer

Traditionally, central banks controlled short-term interest rates directly, which in turn indirectly influenced long-term interest rates, thereby affecting economic activity.

After the global financial crisis in 2008, however, central banks such as the Federal Reserve and the Bank of England implemented monetary policy measures to influence long-term interest rates. These central banks faced the so-called "zero lower bound," where short-term policy interest rates reached zero percent, and took measures to lower long-term interest rates through the purchase of government bonds and other assets in order to further enhance monetary easing. Similarly, the Bank of Japan introduced a comprehensive monetary easing policy in October 2010 to encourage a decline in longer-term interest rates. Moreover, under Quantitative and Qualitative Monetary Easing (QQE) introduced in April 2013, the Bank started to conduct large-scale purchases of Japanese government bonds (JGBs), with a view to encouraging a decline in interest rates across the entire yield curve.

Furthermore, through the Bank's experience in conducting QQE with a Negative Interest Rate introduced in January 2016, it was found that a combination of the negative interest rate policy and large-scale JGB purchases was an effective means to exert influence on the entire yield curve. For details, see "Comprehensive Assessment: Developments in Economic Activity and Prices as well as Policy Effects since the Introduction of Quantitative and Qualitative Monetary Easing (QQE)."

Based on this experience, the Bank introduced QQE with Yield Curve Control in September 2016. Under this framework, the Bank sets two key interest rates -- the short-term policy rate and an operating target for the long-term interest rate -- as a guideline for market operations. Specifically, for the short-term policy rate, the Bank sets the interest rate applied to the Policy-Rate Balances in current accounts held by financial institutions at the Bank. For the long-term interest rate, the Bank sets a level of 10-year JGB yields as an operating target and conducts purchases of JGBs to achieve the target level. For details, see New Framework for Strengthening Monetary Easing: "Quantitative and Qualitative Monetary Easing with Yield Curve Control."