Bank of Japan Governor Haruhiko Kuroda shocked markets by doubling a cap on 10-year yields, sparking a jump in the yen and a slide in government bonds in a move that helps pave the way for possible policy normalization under a new governor.
(Bloomberg) — Bank of Japan Governor Haruhiko Kuroda shocked markets by doubling a cap on 10-year yields, sparking a jump in the yen and a slide in government bonds in a move that helps pave the way for possible policy normalization under a new governor.
The BOJ will now allow Japan’s 10-year bond yields to rise to around 0.5%, up from the previous limit of 0.25%, while keeping both short- and long-term interest rates unchanged, according to a policy statement Tuesday.
The central bank said the move would enhance the sustainability of its monetary easing, but many economists interpreted the move as laying the preliminary groundwork for exiting a decade of extraordinary stimulus policy.
“Whatever the BOJ calls this, it is a step toward an exit,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. “This opens a door for a possible rate hike in 2023 under a new governorship.”
The move blindsided all 47 economists surveyed by Bloomberg ahead of the decision. While most of them said the bank should do more to improve the functioning of the bond market, none had expected a tweak in December.
The surprise decision has the potential to send shockwaves through global financial markets as the BOJ’s steadfast commitment to defending its 10-year yield cap has served as an anchor indirectly helping keep borrowing costs low around the world.
The yen strengthened to as much as 132.28 against the dollar, compared with 137.16 immediately before the announcement. The 10-year yield jumped to as high as 0.46% from 0.25% after the decision.
Japanese bank stocks surged in afternoon trading as investors expected improved earnings for financial institutions. Mitsubishi UFJ Financial Group Inc. rose as much as 9.6%, the most in six years, while Mizuho Financial Group also soared. Overall stocks ended down 1.5%.
The ripple effects also spread far outside Japan, with US stock-index futures slumping and Treasury yields climbing.
Read more: Global Markets Jolted as BOJ Surprises With Yield Policy Change
Kuroda later reiterated at a press briefing that the widening of the yield band was aimed at improving market functioning and smoothing out a distorted yield curve.
Still, the abrupt decision risks further eroding confidence in the central bank’s messaging after the governor and other board members had repeatedly said a widening of the range would be tantamount to raising interest rates.
“This isn’t a rate hike,” said Kuroda. “Although today’s measures will widen the yield band, we believe that the effects of monetary easing, starting with yield curve control, will spread more smoothly through corporate finance and other means as a result.”
There won’t be any significant negative impacts on the economy from today’s move, Kuroda added.
When the BOJ announced it would keep its 10-year yield target unchanged at around zero percent and its short-term interest rate at -0.1%, it also said it would significantly increase its bond purchases to 9 trillion yen ($67.5 billion) per month compared with the currently planned 7.3 trillion yen.
Kuroda said there was no need to expand the movement range any further, but he couldn’t rule out market participants pushing for one.
Investors will need to gauge how much they can rely upon that explanation after Tuesday’s shock move. Adachi at UBS said he was surprised that Kuroda was willing to take another possible hit to his reputation and risk coming out as “the bad guy.”
What Bloomberg Economics Says…
“Make no mistake, a decision to let the 10-year JGB rise is clearly a decision to pare the degree of easing — especially considering the added monetary tightening impact of the stronger yen and weaker stocks.”
— Yuki Masujima, economist
For the full report, click here
In the runup to the BOJ gathering, speculation had centered on the likely direction of policy after Kuroda steps down in April.
“I think the central bank is still getting closer to conducting a review. With the BOJ holding more than 50% of bonds it’s clear that it’s difficult to continue with the current policy,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “It’s also time to take another look at the joint statement with the government.”
Prime Minister Fumio Kishida is planning on revising the decade-old accord with the BOJ and will consider adding flexibility to the agreement’s 2% price goal, local media reported over the weekend. The reports came after a key aide to Kishida told Bloomberg earlier this month that there is a possibility of reaching a new accord with the central bank.
While Kuroda lauded the impact of the accord he indicated that no change was imminent.
“Japan’s economy has steadily improved and is no longer in a state of deflation, and so we don’t believe it’s necessary to revise the joint statement at this time,” Kuroda said.
Still, the reports had kept investors and analysts looking at developments away from the yield band. The 2013 joint statement is seen as a fundamental component of Japan’s push to escape from deflation orchestrated by former Prime Minister Shinzo Abe and put into action by Kuroda, his handpicked BOJ chief.
The BOJ introduced its current policy strategy of controlling short- and long-term interest rates in 2016 after the sustainability of all-out quantitative easing came into question. By buying just enough bonds to keep 10-year yields at zero, the bank was initially able to pare back its purchases.
The bank argues that by letting businesses and households borrow at very low rates and encouraging banks to lend, it can boost economic activity and spur price growth.
In recent months, the governor had repeatedly stuck to a resolutely dovish stance by stressing the need for the stimulus to continue until stronger wage growth takes place, ruling out the possibility the BOJ would take action against the yen’s slump. His staunch defense of the yield settings heightened the sense of surprise with the widening move.
Even if Kuroda’s main intention was to extend the lifespan of the BOJ’s stimulus framework, economists largely agreed that the measure presaged further change under a new leadership and more possible surprises.
“This is a victory for foreign investors and a defeat for the BOJ,” Yasunari Ueno, chief market economist at Mizuho Securities wrote in a note. “The fact the BOJ suddenly changed its policy will strengthen market speculation that an abrupt end for YCC could suddenly materialize out of the blue.”
–With assistance from Yuko Takeo and Yoshiaki Nohara.
(Adds more comments from economists)
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