Bank of Japan bond yield move shocks global markets

The Bank of Japan shocked global markets on Tuesday by widening its target range for 10-year government bond yields.

Kazuhiro Nogi | AFP | Getty Images

Global markets wobble overnight after BOJ unexpectedly expands rate cap 10-Year Japanese Government Bond Yieldtriggering a sell-off in global bonds and stocks.

The central bank adjusts its yield curve control (YCC) policy to allow yields to 10 years Japanese government bonds (JGB) will move 50 basis points either side of their 0% target, up from 25 basis points previously, in a move aimed at cushioning the impact of longer-term monetary stimulus.

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The BOJ said in a policy statement that the move was aimed at “improving market functioning and encouraging a smoother overall yield curve formation, while maintaining accommodative financial conditions.”

The central bank introduced the yield curve control mechanism in September 2016 with the aim of raising inflation to its 2% target following prolonged economic stagnation and ultra-low inflation.

The Bank of Japan, an outlier compared to most major central banks, also left its benchmark interest rate unchanged at -0.1% on Tuesday and vowed to sharply increase purchases of 10-year government bonds, maintaining its ultra-loose monetary policy stance . In contrast, other central banks around the world are continuing to raise interest rates and aggressively tighten monetary policy to curb high inflation.

Changes at YCC prompted yen Global bond yields rose, while stocks in the Asia-Pacific region fell.Japan’s Nikkei 225 Index It was down 2.5% Tuesday afternoon. The 10-year JGB yield briefly climbed above 0.43%, the highest level since 2015.

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U.S. Treasury yields soar as 10-year note climbed about 7 basis points, more than 3.66%, 30-year bond It rose about 9 basis points to 3.7%. Yield is inversely related to price.

European shares also opened lower, with pan-European shares Stoke 600 It fell 1% in early trade before recovering slightly. European government bonds also sold off, German 10-Year Bund Yield It increased nearly 9 basis points to 2.2840%.

‘test the waters’

“The decision was interpreted as a sign to test the waters and possibly unwind the stimulus measures that have been pumped into the economy to try to generate demand and wake up prices,” said Susannah Streeter, senior investment and market analyst. Hargreaves Langston.

“But the central bank remains steadfast in its bond-buying programme, claiming it is a fine-tuning rather than the start of a policy reversal.”

That sentiment was echoed by Mizuho Bank, which said in an email Tuesday that market moves reflected a sudden influx of bets on a hawkish policy turn by the Bank of Japan, but argued that “popular bets are not It means that this is a policy reality, or an expected policy perception.”

“The truth is, neither the fundamental nature of the move nor the accompanying communiqué challenge our fundamental view that the BOJ will adjust policy to ease pressure on the yen, but not turn overtly hawkish,” said Vishnu Varathan, head of economics and strategy at Mizuho Ministry of Finance of Asia and Oceania.

“First, we made every effort to emphasize that policy accommodation is on hold, whether that refers to intentional or potential bond purchases, or to imply that the YCC target range will not expand further (for now).”

Volatility soars

The BOJ noted in its statement that global market volatility has increased since early spring, “which has had a significant impact on these markets in Japan.”

“The functioning of the bond market has deteriorated, especially with regard to the relative relationship between interest rates on bonds of different maturities and the arbitrage relationship between the spot and futures markets,” it added.

If these market conditions persist, they could have a “negative impact on financial conditions such as corporate bond issuance conditions,” the central bank said.

Luis Costa, Citigroup’s head of CEEMEA strategy, said on Tuesday that market moves may be overreacting, telling CNBC there was “absolutely nothing shocking” about the BOJ’s decision.

“You have to take the BOJ’s actions in the context of dollar-yen positioning, which obviously did not anticipate this adjustment. It’s an adjustment,” he said.

Japan’s inflation rate is expected to hit a 40-year high of 3.7% in November, but still well below comparable Western economies, according to a Reuters poll last week.

Costa said the BOJ’s move was not aimed at fighting inflation, but was aimed at the “infrastructure and dynamics of JGB trading” and the volatility gap between JGB trading and the rest of the market.

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