BOJ rocks markets with surprise switch to yield curve policy By Health & Fitness Journal

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©Health & Fitness Journal. FILE PHOTO: A Japanese flag flutters atop the Bank of Japan building under construction in Tokyo, Japan September 21, 2017. REUTERS/Toru Hanai 2/2

By Leika Kihara

TOKYO (Health & Fitness Journal) – The Bank of Japan shocked markets on Tuesday with a surprise change to its bond yield controls, allowing long-term interest rates to rise more sharply, a move aimed at alleviating some of the costs of prolonged monetary stimulus.

Stocks tumbled while yen and bond yields soared after the decision, surprising investors who had expected the BOJ to make no changes to its yield curve control (YCC) until Governor Haruhiko Kuroda steps down in April.

In a move explained as trying to breathe life back into a dormant bond market, the BOJ decided to let the 10-year bond yield move 50 basis points either side of its 0% target, which is above the previous 25 basis point band goes out

But the central bank left its yield target unchanged and said it would sharply increase asset purchases, a sign the move was a fine-tuning of existing ultra-loose monetary policy rather than a easing of stimulus.

Kuroda said the move aims to iron out distortions in the shape of the yield curve and ensure the benefits of the bank’s stimulus plan flow to markets and companies.

“Today’s move aims to improve market functions, thereby helping to increase the impact of our monetary easing. It is therefore not a rate hike,” Kuroda said at a news conference.

“This change will improve the sustainability of our monetary policy framework. It is absolutely not a review that will lead to YCC abandonment or an exit from loose policy.”

CHART: The BOJ widens the band around its yield cap (

As widely expected, the BOJ kept its YCC targets unchanged, which were set at -0.1% for short-term interest rates and around zero for the 10-year bond yield, at a two-day policy meeting that ended Tuesday.

The BOJ also announced it would increase monthly purchases of Japanese government bonds (JGBs) to 9 trillion yen ($67.5 billion) a month from the previous 7.3 trillion yen.

The benchmark stock average fell 2.5% after the decision, while the dollar fell as much as 3.1% to a four-month low of 132.68 yen. The 10-year JGB yield briefly rose to 0.460%, near the BOJ’s newly set implied ceiling and the highest level since 2015.

UNCONVINCED

Stressing that the move is not a prelude to a major change in the YCC and an eventual exit from ultra-light policy, Kuroda maintained his view that Japan’s fragile economy still needs support.

However, some market participants were not convinced.

“Maybe this is a small step to test the strategy and see what the market reaction is and how strong it is responding,” said Bart Wakabayashi, Tokyo branch manager at State Street (NYSE:). “I think we see the first toe in the water.”

Markets are already guessing what the BOJ’s next move might be as Kuroda’s term draws to a close and inflation is expected to stay above its 2% target well into next year.

“They’ve expanded the bond, and I think that came sooner than expected. It raises the question of whether this is a harbinger of more policy normalization to come,” said Moh Siong Sim, currency strategist at the Bank of Singapore.

Bucking the broader market downtrend, shares in the Japanese banking sector rose 5.12%, underscoring investors’ expectations that years of extremely low interest rates, which depressed loan and deposit income, may be coming to an end.

The abrupt decision to widen the yield band rather than wait for the right time to make bolder adjustments to YCC underscores the challenges the BOJ faces in managing the rising costs of prolonged easing.

It also reflects the broader challenge facing central banks around the world in trying to effectively communicate a shift to less accommodative monetary policies after a prolonged period of unorthodox monetary policy conditions.

“The way the BOJ abruptly moved without communicating with the markets makes the BOJ’s actions unpredictable and makes it almost impossible to read their minds,” said Atushi Takeda, chief economist at Itochu Economic Research. “Whoever becomes the next BOJ governor must strive to make monetary policy more transparent and predictable.”

The BOJ’s ultra-low interest rate policies and relentless bond-buying to defend its yield cap have drawn increasing public criticism for distorting the yield curve, draining market liquidity and fueling an unwanted fall in the yen that has pushed up the cost of commodity imports Has.

Much of this public anger has been centered on Kuroda, who was chosen as BOJ governor a decade ago by former Prime Minister Shinzo Abe to boost sluggish consumer demand with massive monetary stimulus.

In a rare admission of the downside of his policy, Kuroda said the decision to widen the yield band now was driven by surveys showing a sharp deterioration in bond market functions.

He also said the BOJ needs to consider not only downside but also upside risks to growth and inflation, and signaled there was scope for a stimulus rollback next year if economic conditions allow.

“It is premature to discuss details of changing the monetary policy framework or exiting loose policy,” Kuroda said.

“When the achievement of our goal comes into sight, the BOJ Political Board will hold talks on an exit strategy and offer communications to the markets.”

($1 = 133.3200 yen)