Bank Of Japan Surprises Global Markets, Changes 2016 Yield Curve Policy: A Look At The Implications

The Bank of Japan (BOJ) on Tuesday expanded the trading band on its 10-year yield target from (plus or minus) 0.25% to 0.5%, a move that has the potential to jolt global financial markets.

What Happened: The BOJ's decision to adjust its yield curve control (YCC) policy was surprising, as the central bank has traditionally been steadfast in its commitment to defending the yield limit.

The BOJ's decision to raise the yield cap has significant implications for the Japanese government, as it will likely lead to higher borrowing costs. As the Japanese government is one of the largest issuers of bonds in the world, the increased borrowing costs will likely result in higher bond yields in Japan.

This may lead investors to alter their expectations for future interest rate movements, which might result in a global repricing of bond yields and interest rates.

Meanwhile, the BOJ kept its YCC targets unchanged at -0.1% for short-term interest rates and near zero for the 10-year bond yield.

The central bank will also dramatically increase bond purchases, according to Reuters, indicating that the action was more of a fine-tuning of the current ultra-loose monetary policy than a withdrawal of stimulus.

Why It Matters: The central bank's action was intended to correct yield curve anomalies and make sure that markets and businesses are receiving the benefits of the BOJ's stimulus program.

"Today's step is aimed at improving market functions, thereby helping enhance the effect of our monetary easing. It's therefore not an interest rate hike," Governor Haruhiko Kuroda said in a news conference.

A further firming of the yen would help reduce the cost-push inflation that is weighing on domestic-oriented businesses and households. This news comes months before Prime Minister Fumio Kishida chooses Kuroda’s successor.

Governor Kuroda had repeatedly stuck to a resolutely dovish stance by stressing the need for stimulus until there is stronger wage growth. Throughout Jerome Powell’s “transitory” and “soft” phases, Kuroda ruled out the possibility that the BOJ would take action against the yen’s slump.

"This change will enhance the sustainability of our monetary policy framework,” Kuroda said. “It's absolutely not a review that will lead to an abandonment of YCC or an exit from easy policy."

Speculation had been growing ahead of the BOJ's two-day meeting about the likely direction of policy after Kuroda steps down. Now, Kuroda has taken the first step to provide some clarity.

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