20.12.2022 – Big surprise from the Bank of Japan: Tokyo has made an unexpected change in strategy. The central bank wants to loosen the range in which long-term bond yields move. The market sees this as a first step towards tightening the monetary reins. The yen is gaining significantly.
We could pick USDJPY as the chart for you, but have chosen AUDJPY – because the reaction looks similarly drastic. Here is the hourly chart.
Source: Bernstein Bank GmbH
This is what happened: Until then, the BoJ had always emphasised that it was the only major central bank in the world to maintain its strategy of extremely loose monetary policy to support domestic demand.
Yield cap rises to 0.5 per cent
And now the turnaround. The central bank is sticking to its programme of keeping borrowing costs down. But then the sticking point: the yields of ten-year Japanese government bonds are to be allowed to fluctuate between minus 0.5 percent and plus 0.5 percent in future. The previous range was minus 0.25 per cent and plus 0.25 per cent.
This translates as: The Japanese central bank will now allow a stronger increase in long-term interest rates. The financial blog ZeroHedge commented, “Thus, realistically this is a tightening policy move allowing long-rates to rise from 25bps (the prior YCC limit) to 50bps (the current YCC limit).”
Premature turnaround
Bank of Japan Governor Haruhiko Kuroda caught the financial markets on the wrong foot. Most forex experts had expected a correction of the enormously expansive monetary policy only in spring, because Kuroda’s successor, who has not yet been appointed, will take office then. We are curious to see whether and how the BoJ can contain the interest rate rise at 0.5 per cent. In addition, the question arises whether the currency market will not quickly correct the current violent reaction. Bernstein Bank wishes you successful trades and investments!
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