The Bank of Japan on Tuesday shocked global markets by widening the goal range for its 10-year government bond yield.
Kazuhiro Nogi | Afp | Getty Images
Global markets were jolted overnight after the Bank of Japan unexpectedly widened its cap on 10-year Japanese government bond yields, sparking a sell-off in bonds and stocks around the globe.
The central bank caught markets off guard by tweaking its yield curve control (YCC) policy to permit the yield on the 10-year Japanese Government Bond (JGB) to maneuver 50 basis points either side of its 0% goal, up from 25 basis points previously, in a move aimed toward cushioning the results of protracted monetary stimulus measures.
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In its policy statement, the BoJ said the move is meant to “improve market functioning and encourage a smoother formation of the complete yield curve, while maintaining accommodative financial conditions.”
The central bank introduced its yield curve control mechanism in September 2016, with the intention of lifting inflation towards its 2% goal after a protracted period of economic stagnation and ultra-low inflation. The introduction of YCC got here after the Bank ran out of bonds to purchase as a part of its quantitative easing efforts, and was also response to yield curve distortions arising from negative rates.
The BoJ — an outlier compared with most major central banks — left its benchmark rate of interest unchanged at -0.1% and vowed to significantly increase its rate of 10-year government bond purchases, retaining its ultra-loose monetary policy stance. In contrast, other central banks around the globe are continuing to hike rates and tighten monetary policy aggressively in an effort to rein in sky-high inflation.
The YCC change prompted the Japanese yen and bond yields around the globe to rise, while stocks in Asia-Pacific tanked. Japan’s Nikkei 225 was down 2.5% on Tuesday afternoon. The ten-year JGB yield briefly climbed to over 0.43%, its highest level since 2015.
U.S. Treasury yields spiked, with the 10-year note climbing by around 7 basis points to exceed 3.66% and the 30-year bond rising by around 9 basis points to three.7%. Yields move inversely to prices.
Shares in Europe also retreated on the open, with the pan-European Stoxx 600 shedding 1% in early trade before recovering barely. European government bonds also sold off, with Germany’s 10-year bund yield adding almost 9 basis points to 2.2840%.
‘Testing the water’
“The choice is being read as an indication of testing the water, for a possible withdrawal of the stimulus which has been pumped into the economy to attempt to prod demand and get up prices,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“However the Bank continues to be staying firmly plugged into its bond purchase program, claiming that is just nice tuning, not the beginning of a reversal of policy.”
That sentiment was echoed by Mizuho Bank, which said in an email Tuesday that the market moves reflect a sudden flurry of bets on a hawkish policy pivot from the BoJ, but argued that the “popular bet doesn’t mean that’s the policy reality, or the intended policy perception.”
“Fact is, there’s nothing in the elemental nature of the move or the accompanying communique that challenges our fundamental view that the BoJ will calibrate policy to alleviate JPY pressures, but not turn overtly hawkish,” said Vishnu Varathan, head of economics and strategy for the Asia and Oceania Treasury Department at Mizuho.
“For one, there was every effort made to emphasise that policy accommodation is being maintained, whether this was in reference to intended in addition to potential step-up in bond purchases or suggesting no further YCC goal band expansion (for now).”
Spikes in volatility
The Bank of Japan noted in its statement that since early spring, market volatility around the globe had risen, “and this has significantly affected these markets in Japan.”
“The functioning of bond markets has deteriorated, particularly by way of relative relationships amongst rates of interest of bonds with different maturities and arbitrage relationships between spot and futures markets,” it added.
The central bank said if these market conditions continued, it could have a “negative impact on financial conditions corresponding to issuance conditions for corporate bonds.”
“The Bank expects that the measures decided today will facilitate the transmission of monetary easing effects generated under the framework of yield curve control, corresponding to through corporate financing,” it said.
“The Bank will aim to realize the value stability goal by enhancing the sustainability of monetary easing under this framework through implementing these measures.”
