BOJ changes yield curve control, shakes markets with surprise monetary policy


The Bank of Japan shocked markets on Tuesday with a surprise change in its bond yield controls, allowing long-term interest rates to rise more sharply, a move aimed at alleviating some of the costs of prolonged monetary stimulus.

Stocks tumbled while yen and bond yields soared after the decision, surprising investors who had expected the BOJ to make no changes to its yield curve control (YCC) until Governor Haruhiko Kuroda steps down in April.

In a move aimed at breathing life back into a dormant bond market, the BOJ decided to allow the 10-year bond yield to move 50 basis points either side of its 0% target, which is above the previous 25 basis point band.

But the central bank left its yield target unchanged and said it would sharply increase asset purchases, a sign the move was a fine-tuning of existing ultra-loose monetary policy rather than a easing of stimulus.

“Maybe this is a small step to test the strategy and see how the market reacts and how strongly it reacts,” said Bart Wakabayashi, Tokyo branch manager at State Street. “I think we see the first toe in the water.”

As widely expected, the BOJ left its YCC targets unchanged, which were set at -0.1% for short-term interest rates and around zero for the 10-year bond yield, at a two-day policy meeting that ended Tuesday.

The BOJ also announced it would increase monthly purchases of Japanese government bonds (JGBs) to 9 trillion yen ($67.5 billion) a month from the previous 7.3 trillion yen.

“Through these moves, the BOJ will aim to meet its price target by improving the sustainability of monetary easing under this framework,” the BOJ said in a statement, signaling that the move was aimed at extending the YCC rather than it to let expire.

The benchmark Nikkei 225 fell 2.5% after the decision, while the dollar fell 2.7% to a four-month low of 133.11 yen. The 10-year Japanese government bond (JGB) yield briefly rose to 0.460%, near the BOJ’s newly set implied ceiling.

Markets are already guessing what the BOJ’s next move might be as Kuroda’s term draws to a close and inflation is expected to stay above its 2% target well into next year.

“They’ve expanded the band and I guess that came sooner than expected. It raises the question of whether this is a harbinger of further developments in terms of policy normalization,” said Moh Siong Sim, currency strategist at Bank of Singapore.

“It is written that the sharp yen weakness we have seen previously may have been uncomfortable for policymakers… it is clear that this adds to the story of yen strength over the next year.”

The BOJ’s ultra-low interest rate policy and its relentless bond buying to defend its yield cap have drawn increasing public criticism for distorting the yield curve, draining market liquidity and fueling an unwanted slide in the yen that has pushed up the cost of commodity imports.

Kuroda has repeatedly said he sees no need for the BOJ to tweak YCC, including taking immediate steps to address the side effects like the distortion it caused in the bond market.

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