Bank of Japan policy tweak jolts markets, yen gains over 3% against dollar

The Bank of Japan (BOJ) jolted the world markets in an unexpected move, as Treasury yields rose and global equities fell after it went in a completely different direction of its peers around the globe.

As a result, Japanese government bonds and Treasuries both slumped, while the yen surged after the BOJ raised its cap on benchmark 10-year yields to around 0.5 percent from 0.25 percent, surprising the economists.

Meanwhile, the yen strengthened to as much as 133.21 against the dollar, up more than 3 percent at one point, but the Nikkei 225 and the Topix fell 2.46 percent to 26,568.03 and 1.54 percent to 1,905.59 respectively.

Generally, it’s thought that central banks can control only short-term interest rates, but the BOJ believes that its own form of quantitative easing will help control the 10-year and steepen the yield curve —increase the difference between the yields of short-term bonds — which are negative in Japan — and long-term bonds.

The turbulence is unlikely to end on Tuesday. Japan is the world’s largest creditor, and tightening domestic financial conditions may result in a wave of capital returning home. That threatens to push down asset prices and boost global borrowing costs at a time the economic outlook is deteriorating. Investors are expected to exit bonds in the US, Australia and France, and developed-market equities also likely to decline, according to UBS Group AG.

Japan’s benchmark 10-year yield jumped as much as 21 basis points to 0.46 percent before dropping back to 0.4 percent after the BOJ also announced unscheduled debt-purchase operations. Trading of Japanese bond futures was briefly halted by the Osaka Exchange after they hit a circuit breaker threshold. The yen strengthened as much as 3.5 percent to 132.28 per dollar.

However, BOJ Governor Haruhiko Kuroda said the central bank will not hesitate to further ease its monetary policy if it’s necessary as the economy faces many uncertainties.

Kuroda told a press briefing that it’s too early to debate an exit from the current policy, and that strategies for an exit should be discussed at policy meetings if the economy nears the central bank’s inflation target of 2 percent.

He said further widening of the yield band wasn’t needed and the shift in yield-curve control was likely to be positive for the economy.

The policy adjustment came after an increase in Japan’s core inflation to a four-decade high bolstered the case for a reduction in central bank stimulus. Speculation of a shift had jolted markets on Monday after Kyodo news reported that Prime Minister Fumio Kishida was planning to revise a decade-old accord with the BOJ on the 2 percent inflation goal.

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