Bank of Japan, SNB and Bank of England: Yield Curve Control, Negative Rates and Policy-Divergence Trades

What you will learn

• How yield curve control (YCC) fixed a long-term yield and why it ended in 2024.
• How negative policy rates worked with tiering and what they did to banks.
• Why the Bank of England's published vote split is a signal.
• How to calculate the carry and break-even of a policy-divergence trade using the forward rate.

Explanation

Bank of Japan: controlling the curve, not just the overnight rate

From September 2016 the Bank of Japan (BoJ) also targeted the 10-year Japanese government bond (JGB) yield at "around 0%". This is yield curve control: the bank promises to buy unlimited bonds at a fixed yield, so the yield cannot rise above the cap. The tolerance band was widened step by step from ±0.1 to ±0.5 percentage points, and in 2023 1% became a reference rather than a hard cap.

The cost appeared when global yields rose in 2022 and 2023: defending the cap required very large purchases, the BoJ came to own roughly half of all JGBs, and the gap to rising foreign yields weakened the yen. In March 2024 the BoJ ended both YCC and its negative rate and has since raised the short-term rate in small steps; as of 2026 it remains far below US and euro-area rates, so check the current level.

Negative rates and tiering

A negative policy rate means banks pay to hold excess reserves at the central bank. The ECB's deposit rate was negative from 2014 to July 2022 (reaching −0.5%), the Swiss National Bank (SNB) charged −0.75% from January 2015 to September 2022, and the BoJ −0.1% from 2016 to 2024. All three used tiering: only reserves above an exemption threshold were charged. Negative rates pushed money-market and bond yields below zero but were rarely passed on to retail depositors, which squeezed bank margins. In June 2025 the SNB cut its rate back to 0% and did not exclude negative rates again; check the current stance.

The SNB adds foreign-exchange intervention: it has bought foreign currency to slow franc appreciation and later sold it to fight imported inflation, so its balance sheet is mostly foreign assets and its profit swings with exchange rates.

Bank of England: a committee that votes in public

The Bank of England (BoE) sets Bank Rate through a nine-member Monetary Policy Committee (MPC), five internal and four external members. Decisions are by majority and the vote split is published with the decision ("5–4 to hold"). A hold with four votes for a cut is a dovish hold. The BoE was also the first major central bank to run active quantitative tightening, selling gilts rather than only letting them mature, and in September 2022 it briefly bought long gilts to stop a pension-fund (LDI) spiral.

Policy-divergence trades

A divergence trade holds the higher-yielding currency against the lower-yielding one when their central banks move apart. The forward rate from covered interest parity (Forex in Depth, lesson 4) tells you how far spot may move against you before the carry is gone.

Worked example

Hypothetical example: one-year dollar rate 4.50%, one-year yen rate 0.50%, spot USD/JPY 150.00 (invented round numbers). A trader buys $10,000 against yen for one year; spreads, swap mark-ups and taxes are ignored.

Step 1 – one-year forward: 150.00 × (1 + 0.005) ÷ (1 + 0.045) = 150.00 × 0.96172 ≈ 144.26. The forward is below spot because the dollar yields more.

Step 2 – carry if spot is unchanged: bought at 144.26, worth 150.00. Gain = 10,000 × (150.00 − 144.26) = ¥57,400 ≈ $383, about 3.8%.

Step 3 – break-even: spot must stay above 144.26. A yen appreciation of more than 3.8% erases the carry.

Step 4 – divergence ends: the BoJ hikes 50 basis points and the Fed cuts 50; the differential narrows to 3.0 points and the new forward would be 150.00 × 1.010 ÷ 1.040 ≈ 145.67. The yen usually rallies as soon as this is expected, before the differential has actually changed.

Step 5 – a 10% yen rally to 135.00: 10,000 × (135.00 − 144.26) = −¥92,600 ≈ −$686, about −6.9%, almost twice the full-year carry. With leverage, as in forex CFDs, losses can exceed the deposit quickly.

Common mistake

Practice activity

On paper: one-year pound rate 4.00%, franc rate 0.00%, spot GBP/CHF 1.1000. You buy £10,000 against francs for one year. (a) Forward. (b) Carry in francs if spot is unchanged. (c) Spot falls to 1.0500: result in francs and percent. (d) The BoE vote shows four of nine members wanting a cut while the SNB warns about negative rates. Does this strengthen or weaken the trade?

Key takeaways

• Yield curve control caps a long yield with unlimited purchases; once foreign yields rise it costs balance sheet and currency weakness. The BoJ ended it in March 2024.
• Negative rates with tiering pushed market yields below zero but squeezed banks; the ECB, SNB and BoJ have all exited.
• The BoE publishes its MPC vote split; the split is a forward-looking signal in itself.
• Forward = spot × (1 + quote-currency rate) ÷ (1 + base-currency rate); the distance between spot and forward is your maximum carry and your break-even.

Next step

Next, we trace how a policy change travels into real rates, term premia, equity multiples, credit spreads and currencies, and why the full effect takes 12 to 18 months.