Abstract
On September 21st, 2016, the Bank of Japan (BOJ) embarked on a new unconventional monetary policy, called yield curve control (YCC). We show that YCC creates an arbitrage opportunity in an otherwise frictionless and arbitrage-free government bond market which financial institutions can exploit. This arbitrage creates a wealth transfer from the BOJ to these financial institutions. We estimate a lower bound on this wealth transfer for the first 28 months to be $5.25 billion or 582.32 billion yen, which constitutes an unexplored policy externality. This corresponds to 7.49 percent per annum on the notional employed in this arbitrage strategy.
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