Japanese bond yields continue to rise after Bank of Japan bombshell
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The yen moderated and Japanese government bond yields rose on Wednesday as investors weighed whether the Bank of Japan’s shock policy tweak signalled the beginning of an end to its decade-old ultra-loose monetary experiment.
The yield on two-year notes also inched into positive territory for the first time in seven years, according to broker Japan Bond Trading. For now, though, strategists at Goldman Sachs said the global spillover effect from the BoJ’s revision to its longstanding yield curve control measures was likely to be limited, ruling out a repeat of the gilt market turmoil in October.
On Tuesday, the Bank of Japan said it would allow 10-year bond yields to fluctuate by plus or minus 0.5 percentage points from its target of zero, instead of the previous band of plus or minus 0.25 percentage points, while keeping overnight interest rates at minus 0.1 per cent.
BoJ governor Haruhiko Kuroda later stressed that the bank would maintain its yield target and said the adjustment did not amount to a tightening of monetary policy.
Investors remain deeply divided on whether the move heralds a “pivot” by the BoJ, which is the last of the world’s leading central banks to stick to an ultra-loose monetary regime.
Nomura’s chief Japan economist, Kyohei Morita, said the widening of the yield target should not be “interpreted as a shift in the direction of policy toward tightening”.
Naohiko Baba, the chief Japan economist at Goldman Sachs, said the central bank’s next policy decision could be significant and include changing long- or short-term policy rate targets or scrapping yield curve control.
“The BoJ’s greater emphasis on the need to enhance the JGB [Japanese government bond] market functioning suggests to us an increased likelihood that it will abandon the negative interest rate policy from the perspective of strengthening the sustainability of YCC,” he said.
The IMF said on Wednesday that the move was “sensible” but clearer communications would help anchor market expectations.
“With uncertainty around the inflation outlook, the Bank of Japan’s adjustment of yield curve control settings is a sensible step including taking into account concerns about bond market functioning,” Ranil Salgado, the IMF’s mission chief to Japan, said in a statement.
The yield on the 10-year Japanese government bond added 0.05 percentage points to reach 0.45 per cent on Wednesday, after surging by its most in almost two decades the day before.
Japanese stocks headed lower on Wednesday, with the Topix shedding 0.6 per cent after selling off on Tuesday in the wake of the BoJ’s announcement. The Nikkei 225 fell 0.7 per cent.
Despite the declines, Junichi Inoue, head of Japanese equities at Janus Henderson Investors, said that the BoJ tweak would quell speculative positions built up against the Japanese yen, providing a positive for the country’s equities.
“While I expect some volatility in the short term, as this decision will take time to digest, it should be very positive for the overall market as it will remove unreasonable prices such as Y150/$, the extremely high multiple, or ultra-low cap rate,” he wrote in a note.
The yen moderated on Wednesday, declining 0.3 per cent to trade at ¥132.14 per dollar, after strengthening more than 4 per cent on Tuesday.
Stocks were muted elsewhere in Asia, with Hong Kong’s Hang Seng index and South Korea’s Kospi both flat and China’s CSI 300 up 0.1 per cent.
The dollar gained 0.1 per cent against a basket of peers, with the renminbi declining 0.1 per cent to trade at Rmb6.969 and the won shedding 0.3 per cent to hit Won1286.93.
European futures pointed higher, with contracts for the Euro Stoxx 50 and FTSE 100 up 0.6 per cent and 0.5 per cent, respectively.
Oil prices were flat, with international benchmark Brent crude trading at $80.01 per barrel.