FirstFT: Bank of Japan stuns markets with policy change

Good morning. Yesterday, the Bank of Japan stunned the markets unexpected change in controversial yield curve management policy (YCC), which caused large fluctuations in the currency, bond and stock markets.

The Bank of Japan is the latest of the world’s key central banks to pursue an ultra-loose monetary policy and purchases of government bonds to stimulate growth.

But like everywhere else in the world, Japan’s inflation has risen sharply this year. Core inflation, which excludes food price volatility, has been above the Bank of Japan’s 2 percent target for seven consecutive months, hitting a 40-year high of 3.6 percent in October.

Japan’s increasingly exclusive status contributed to huge fall in the yen this year as markets factored in the difference with the tightening of interest rates by the US Federal Reserve.

The central bank said yesterday that it will allow yields on 10-year bonds to fluctuate within plus or minus 0.5% instead of the previous 0.25%. It kept overnight interest rates at minus 0.1 percent.

Movement provoked sell-offs in the global government bond markets. The yield on 10-year Japanese government bonds rose to 0.47%, the highest level since 2015. The yield on 10-year US Treasury bonds rose 0.11 percentage points to 3.69%, while the equivalent yield on British securities rose by a similar amount to 3.6%. cent.

The yen jumped more than 4 percent to 131.2 yen against the US dollar, while the Topix stock index fell 1.5 percent.

Outgoing Bank of Japan Governor Haruhiko Kuroda denied that the policy change was tantamount to tightening monetary policy. He said the change was intended to address heightened volatility in global financial markets and improve the functioning of Japan’s bond markets.

The BOJ’s efforts to protect yield curve targets contributed to a steady decline in market liquidity in the Japanese government bond market, resulting in what some analysts called “dysfunction”.

The central bank now owns more than half of outstanding government bonds, up from 11.5% when Kuroda became governor in March 2013.

Mansoor Mohi-uddin, chief economist at the Bank of Singapore, said the statement indicated that the Bank of Japan was considering a broader exit from its YCC policy, comparing it to the 1989 decision to raise interest rates that led to decades of deflation.

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