The Bank of Japan’s yield curve control (YCC) is drawing attention from other central banks, including the US Federal Reserve, as a possible policy tool to help economies recover from the devastation caused by coronavirus pandemic. Fed officials, including New York Federal Reserve Bank President John Williams, have recently said YCC could be a tool to complement forward guidance. After cutting rates to historic lows, Australia’s central bank set a target of around 0.25% for the three-year bond yield. The BOJ pioneered YCC. This is how it has worked in Japan and its potential pitfalls. WHY DID BOJ INTRODUCE YCC? YCC is generally seen as a tool to keep borrowing costs low. But when it was adopted in 2016, the BOJ’s main purpose was to avoid excessive rate declines.After years of huge bond buying failed to fire up inflation and dried up market liquidity, the BOJ cut short-term rates below zero in January 2016 to fend off an unwelcome yen rise. The move crushed yields across the curve, outraging financial institutions that saw returns on investment evaporate. To pull long-term rates back above zero, the BOJ adopted YCC eight months later by adding a 0% target for 10-year bond yields to its -0.1% short-term rate target. The idea was to control the shape of the yield curve so that short- to medium-term rates – which affect corporate borrowers – fall, without pushing down super-long yields too much and reducing returns for pension funds and life insurers.