Market Extra: Why the Bank of Japan’s surprise policy twist is rattling global markets

by | Dec 20, 2022 | Stock Market

Anchors aweigh? The Bank of Japan sent shock waves through global financial markets Tuesday, effectively loosening a cap on 10-year government bond yields in a surprise move seen as potentially pointing the way to a broader tightening by the last major global central bank to maintain an ultraloose monetary policy.

Analysts and economists debated the significance of the move. But the market reaction showed global investors were rattled by the potential for the Bank of Japan to eventually give up its role as the last remaining low-rate anchor. “The fact that investors see today’s move as heralding a bigger shift is evident from the market reaction,” said Jim Reid, strategist at Deutsche Bank, in a note. The BOJ, at a regular policy meeting, said the yield on the 10-year Japanese government bond could rise as high as 0.5% from a previous cap of 0.25%. The central bank, as part of a program known as yield curve control, has maintained a target range around zero for the benchmark government bond yield since 2016 and used that as a tool to keep overall market interest rates low. For its part, the BOJ didn’t cite inflation as a reason for the move, instead highlighting concerns about the functioning of the government bond market. The yen soared, strengthening by more than 3% versus the U.S. dollar
USDJPY,
-4.43%,
while yields on 10-year Japanese government bonds
TMBMKJP-10Y,
0.417%
were up 16 basis points at 0.413%, after hitting their highest level since 2015. U.S. Treasury yields
TMUBMUSD10Y,

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