Yield Curve Control [YCC]

Yield Curve Control (YCC) is a monetary policy tool where central banks target specific yields on government bonds of particular maturities, committing to buy whatever amount necessary to maintain those yields. The Bank of Japan has used YCC since 2016, targeting 0% for 10-year Japanese government bonds while maintaining negative short-term rates. This requires unlimited bond purchases when yields approach the cap. For example, the BOJ bought 10 trillion yen in bonds during single days to defend its yield target. The Federal Reserve used YCC during World War II, capping Treasury yields to reduce war financing costs. Australia’s central bank implemented YCC from 2020-2021, targeting 3-year yields at 0.25%. Benefits include enhanced forward guidance and lower borrowing costs across the yield curve. However, YCC risks include massive balance sheet expansion, loss of market price discovery, and difficult exit strategies. When inflation surged in 2022, the BOJ faced intense pressure defending its yield cap, eventually widening the band to 0.5% then 1.0%.