As the last central bank among the world's developed economies to hold a year-end interest rate meeting in 2022, the Bank of Japan completely created a major surprise for the world yesterday...
The Bank of Japan unexpectedly announced in the interest rate resolution announced on Tuesday that it will allow Japan's 10-year government bond yield to rise to about 0.5%, which is higher than the previous upper limit of the fluctuation range of 0.25%. This expansion of the yield curve control zone was something that almost no market participants had expected before.
After the resolution results were released, the Japanese financial market quickly fell into a "big earthquake". The US dollar-yen exchange rate plummeted nearly 400 points during the session, falling below the four levels of 137, 136, 135, and 134. The latest trading was around 133.14. The Japanese yen's cumulative increase in less than 10 minutes was as high as more than 2%.
At the same time, the Nikkei 225 index quickly plummeted nearly 3% at the afternoon opening.
After the central bank opened the shackles of yield curve control, Japan's 10-year government bond yield quickly surged from the original 0.25% to near the new upper limit of 0.5%, the highest since 2015.
Industry insiders originally expected that even if the Bank of Japan changes its monetary policy in the future, it is likely to be done only after Governor Haruhiko Kuroda steps down in April next year. But yesterday's decision obviously exceeded everyone's expectations. All 47 economists surveyed earlier by foreign media had expected that the Bank of Japan would not change monetary policy yesterday.
In the latest monetary policy statement, the Bank of Japan stated that it will continue to maintain the benchmark interest rate at a historical low of -0.1% and maintain the 10-year government bond yield target near 0%. The Bank of Japan decided to adjust its control over the yield curve to improve market functioning and encourage a smoother formation of the entire yield curve while maintaining accommodative financial conditions.
The Bank of Japan noted that through these steps, it will work to strengthen the sustainability of monetary easing under this framework to achieve the price target.
The Bank of Japan also announced routine unplanned bond purchase operations yesterday. The Bank of Japan proposed to directly purchase 100 billion yen of 1-3-year Japanese government bonds, 100 billion yen of 3-5-year Japanese government bonds, 300 billion yen of 5-10-year Japanese government bonds, and 100 billion yen of 10-25-year Japanese government bonds starting from December 21.
Global markets are in shock
In addition to the Japanese market itself, the Bank of Japan’s unexpected decision to adjust the yield curve control policy yesterday also quickly set off shock waves in the global market. Because this marks that Japan, as the last country in developed markets to insist on low interest rates, is also beginning to move towards policy normalization.
After the Bank of Japan’s decision was released, the Bloomberg U.S. dollar spot index fell 0.7%. The ICE U.S. Dollar Index also briefly fell below the 104 mark, and was last trading around 104.33. Spot gold prices rose back above the $1,800 mark.
In the bond market, Australia's 10-year Treasury bond yields surged by about 23 basis points during the day, and the U.S. 10-year Treasury bond yields also rose a further 11 basis points, with the latest trading at 3.688%.
US stock index futures weakened across the board during the Asian session, Nasdaq futures fell more than 1%.
Industry Comments
We reported on Monday that Japan and the United States broke the news last weekend that the Japanese government is planning to revise a 10-year-old joint statement with the Bank of Japan and will consider adding flexibility to the agreement's 2% price target. Although this revelation was subsequently denied by Japanese government officials, speculation surrounding whether the Bank of Japan will make major policy changes after Governor Haruhiko Kuroda's term ends next year has never dissipated.
The major policy change released by the Bank of Japan yesterday, which can be called a "black swan", also quickly triggered heated discussions among industry insiders.
Takeshi Minami, an economist at Norinchukin Research Institute, said that the Bank of Japan's unexpected change was seen by the market as part of the tightening measures, which was inevitable. He predicts that the Bank of Japan's goal is not only to curb market distortions, but may also want to prevent monetary policy from supporting unsound fiscal policy .
Moh Siong Sim, FX strategist at Bank of Singapore , pointed out that the Bank of Japan has expanded the range of 10-year government bond yields earlier than expected. This raises the question: from a policy normalization perspective, does this portend more austerity shifts ahead?
Sim said that the previous sharp weakening of the yen is making policymakers uneasy, which obviously increases the possibility of a stronger yen next year.
Kerry Craig, global strategist at JP Morgan Asset Management, said that the measures introduced by the Bank of Japan yesterday were earlier than he expected and were also a step towards the normalization of policy by the Bank of Japan. However, this is only the first step, yield curve control policies are still in place, as are negative interest rate policies. If the Bank of Japan is to further adjust its policy, inflation will need to continue to rise, and by then the YCC policy may no longer be necessary.
Craig pointed out that at present, the impact of the Bank of Japan's actions is most widespread in the foreign exchange market . The Bank of Japan is signaling a gradual exit from its ultra-easy policy, which should be positive for the yen in the short term.
This article comes from
of Financial Associated Press
