The Bank of Japan shocked global markets on Tuesday by widening the target range for its 10-year government bond yield.
Kazuhiro Nogi | AFP | Getty Images
The central bank surprised markets by tweaking its yield curve control (YCC) policy to allow for the yield on the ten years The Japanese government bond (JGB) is moving 50 basis points either side of its 0% target, up from 25 basis points previously to cushion the impact of protracted monetary stimulus.
In its policy statement, the BoJ said the move is “intended to improve the functioning of the market and encourage smoother formation across the yield curve while maintaining accommodative financial conditions.”
The central bank introduced its yield curve control mechanism in September 2016 to lift inflation towards its 2% target after a prolonged period of economic stagnation and ultra-low inflation. The launch of YCC came after the bank ran out of bonds to buy as part of its quantitative easing efforts, and was also in response to yield curve distortions resulting from negative interest rates.
The BoJ – an outlier compared to most major central banks – kept its benchmark interest rate unchanged at -0.1% and pledged to significantly increase its 10-year bond purchase rate and maintain its ultra-loose monetary policy stance. In contrast, other central banks around the world continue to raise interest rates and aggressively tighten monetary policy to curb skyrocketing inflation.
The YCC change prompted the Japanese yen and bond yields rose globally while stocks fell in Asia Pacific. Japan’s Nike 225 was down 2.5% as of Tuesday afternoon. The 10-year JGB yield briefly spiked above 0.43%, its highest level since 2015.
Equities in Europe also openly fell, with the pan-European ones Stoxx 600 lost 1% in early trade before recovering slightly. European government bonds were also sold off Yield on 10-year German Bunds Adding nearly 9 basis points to 2.2840%.
“The decision is being read as a sign of testing the waters for a possible withdrawal of the stimulus pumped into the economy to try to generate demand and lift prices,” said Susannah Streeter, senior investment and markets Analyst at Hargreaves Lansdowne.
“But the bank is still adamant about its bond-buying program, claiming this is just fine-tuning, not the start of a policy reversal.”
That sentiment was echoed by Mizuho Bank, which said in an email on Tuesday that market moves reflect a sudden spate of bets on a radical BoJ course change, but argued that the “popular bet doesn’t mean it’s the policy change.” is reality, or the intended political perception.”
“The fact is, nothing about the fundamental nature of the move or the accompanying communiqué challenges our fundamental view that the BoJ will calibrate policy to ease pressure on the JPY but not turn overtly hawkish,” Vishnu Varathan said , Head of Economics and Strategy Department for Asia and Oceania Ministry of Finance in Mizuho.
“Firstly, every effort has been made to emphasize that policy alignment is maintained, whether in relation to intended and potential intensification of asset purchases or not proposing (for now) any further YCC target range expansion.”
The Bank of Japan noted in its statement that market volatility has increased globally since the spring, “and this has significantly impacted these markets in Japan.”
“The functioning of bond markets has deteriorated, particularly in terms of the relative relationships between interest rates on bonds of different maturities and the arbitrage relationships between spot and futures markets,” she added.
The central bank said if these market conditions continue, it could have “adverse effects on financial conditions such as corporate bond issuance terms”.
“The Bank understands that the measures decided today will facilitate the transmission of monetary easing effects generated through yield curve control, such as through corporate financing,” she said.
“The bank will aim to achieve the price stability objective by improving the sustainability of monetary easing within this framework through the implementation of these measures.”