Bank of Japan shocks global markets with bond yield shift

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

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Global markets rocked overnight Bank of Japan suddenly extended its lid on Yields on 10-year Japanese government bondscaused a wave of sell-offs in bonds and stocks around the world.

The central bank caught the market off guard by adjusting its yield curve control (YCC) policy to allow yields above 10 years The Japanese Government Bonds (JGB) rose 50 basis points from their 0% target, up from 25 basis points previously, in a move aimed at easing the impact of prolonged monetary stimulus measures.

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In its policy statement, the BoJ said the move was intended to “improve market performance and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.” fit.”

The central bank introduced yield curve control in September 2016, with the aim of lifting inflation to its 2% target after a long period of economic stagnation and extremely low inflation. The introduction of YCC comes after the Bank ran out of bonds to buy as part of its quantitative easing efforts and as a response to yield curve distortions arising from negative interest rates. .

The BoJ – an outlier compared to most major central banks – left its benchmark interest rate unchanged at -0.1% and announced it would significantly increase its purchases of 10-year government bonds, and at the same time maintains an extremely loose monetary policy stance. In contrast, other central banks around the world are continuing to raise interest rates and tighten monetary policy aggressively in an effort to contain sky-high inflation.

The change YCC has driven Japanese yen and bond yields around the world rose, while stocks in Asia-Pacific fell. Japanese Nikkei225 fell 2.5% on Tuesday afternoon. Yields on the 10-year JGB bond rose rapidly to more than 0.43%, the highest level since 2015.

US Treasury yields spikewith 10 years notes increase about 7 basis points to exceed 3.66% and 30 year bond increased by about 9 basis points to 3.7%. Yields move inversely with prices.

Shares in Europe also retreated at the open, with a pan-European bias Stoxx 600 1% drop in early trading before a slight recovery. European government bonds also sold off, with German 10-year bond yield added nearly 9 basis points to 2,2840%.

‘Test the water’

“The decision is seen as a sign of water testing, given the possibility of a pullback in the stimulus measures that have been pumped into the economy to try,” said Susannah Streeter, senior investment and market analyst at the company. drive demand and awaken prices”. Hargreaves Lansdown.

“But the Bank has remained steadfast in its bond-buying program, claiming that this is only a fine adjustment, not the beginning of a policy reversal.”

That view was echoed by Mizuho Bank, which said in an email on Tuesday that the market moves reflected a series of abrupt bets on a policy hawk from the BoJ, but argued that “the popular bet does not mean it is policy fact, or intended policy perception.”

Vishnu Varathan, head of economics and strategy, said: “The fact that the fundamental nature of this move or its accompanying announcement does nothing to challenge our fundamental view that the BoJ will adjust. policy to ease pressure on the JPY, but not become too aggressive.” for the Ministry of Finance for Asia and Oceania in Mizuho.

“For one, every effort has been made to emphasize that policy adjustment is on hold, whether this relates to the intended or potential increase in bond purchases or the proposed expand YCC’s target range (for now).”

Sudden fluctuations

The Bank of Japan noted in its statement that since early spring, worldwide market volatility has increased, “and this has significantly impacted these markets in Japan. “

“The performance of the bond market has deteriorated, particularly in terms of the relative relationship between interest rates on bonds of different maturities and the arbitrage relationship between the spot and futures markets, ” it added.

The central bank said that if these market conditions persist, it could have a “negative impact on financial conditions such as corporate bond issuance conditions.”

“The Bank expects that the measures decided today will facilitate the transmission of monetary easing effects generated within the yield curve control framework, such as through corporate finance,” it said.

“The Bank will aim to achieve its price stability objective by enhancing the sustainability of monetary easing within this framework through the implementation of these measures.”


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