Bank of Japan Implements ‘Stealth’ Policy Shift, Pushing Yields to 9-Year High and Strengthening Yen

Continued Loose Policy by Bank of Japan

On Friday, the Bank of Japan (BOJ) made a significant decision regarding its yield curve control (YCC) policy, leading to a surge in Japan’s benchmark bond yield to a nine-year high. In response to increasing pressure from investors to loosen yield controls, the BOJ opted for a more flexible approach.

Date: July 28, 2023

Place: New Delhi, India

Previously, the BOJ allowed the 10-year yield to fluctuate by 0.5% around the 0% target, considering these boundaries as rigid limits. However, the central bank revised its approach and now views these as “references” rather than strict limits. Additionally, to emphasize the policy shift, the BOJ conducted a second fixed-rate bond-buying operation, offering to purchase the 10-year note at a yield of 1.0%, up from the previous rate of 0.5%.

By widening the upper limit for fixed-rate operations to 1%, the BOJ effectively expanded the 10-year target band, as noted by Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities. This move was seen as a “stealth” policy shift, catching many traders off guard.

As a result of the policy announcement, the 10-year Japanese Government Bond (JGB) yield spiked to 0.575%, the highest since September 2014, before slightly easing to 0.55%. Concurrently, the yen experienced a turbulent response, initially sliding to a 1.2% loss against the dollar, only to rally and gain as much as 1.05% at 138.05. Eventually, it settled at 139.08.

The BOJ left the short-term interest rate target unchanged at -0.1%. The Nikkei share average initially experienced significant fluctuations in response to the news, starting with the aggressive paring of morning losses, then reversing course to dive as much as 2.6%. However, it eventually closed down 0.4% at 32,759.23.

Financial shares on the Tokyo Stock Exchange soared, with the banking index reaching an eight-year high, as investors anticipated a steeper yield curve that could boost profits from lending. The top-performing stocks on the Nikkei were primarily banks and life insurers, with Resona Holdings leading the gains with an 8.2% jump.

The policy announcement’s ambiguity contributed to initial volatility across various asset classes, according to Richard Kaye, a portfolio manager at Comgest. Nevertheless, some investors are looking beyond the bank trade, focusing on the yen’s stabilization, which has been influenced by the sovereign yield gap with the U.S., thereby favoring domestic economy beneficiaries in Japan, especially small-cap companies.

The BOJ’s decision came amid rising wages and consumer prices, with core consumer inflation in Japan’s capital exceeding the central bank’s 2% target. The BOJ updated its outlook report, increasing this year’s core consumer inflation forecast to 2.5% (up from 1.8% projected in April), while slightly reducing it’s fiscal 2024 forecast to 1.9% (down from 2.0%) and maintaining the 1.6% estimate for 2025. The central bank also acknowledged signs of heightened price expectations.

Overall, the BOJ’s policy shift signals its readiness to take gradual steps to tighten policy if inflation pressures persist, according to Charu Chanana, a strategist at Saxo Markets in Singapore. Consequently, markets may test the 1% cap, potentially leading to bullish outcomes for the yen.


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Sources- The Print, Reuters, Financial Express