Market Extra: What’s at stake for global markets if Bank of Japan gives up on holding down bond yields

by | Oct 25, 2022 | Stock Market

When the Bank of Japan meets later this week, investors will be watching closely for any signs that Japanese authorities might be preparing to tweak, or perhaps even jettison, a policy of actively keeping a lid on Japanese government bond yields that is looking increasingly out of step with what its rivals are doing. The policy, known as yield curve control, has been in place since 2016. But in a world where the Federal Reserve is hiking interest rates at the fastest pace since the 1980s, Japanese authorities have decided to stand firm for a number of reasons.

In a sense, it may not matter what BoJ Gov. Haruhiko Kuroda says or does after the meeting later this week, because according to George Saravelos, Deutsche Bank’s global co-head of FX research, the central bank’s approach is already irreparably “broken.” Over the past few months, speculators and investors have become increasingly disillusioned with the BoJ and have tried to test its limits by shorting Japanese bonds. Futures markets show government bond yields considerably higher than in the spot market, market strategists said. As a result, yields on Japanese sovereign bonds have started to test, and even break above, the caps imposed by the BoJ, as Saravelos pointed out. Now, only a few issues of JGB 10-year bonds
TMBMKJP-10Y,
0.256%
eligible for repurchase by the central bank are still trading below the YCC yield cap, h …

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