Yen Surges as Kuroda’s Yield Cap Shock Heralds BOJ Normalization

(Bloomberg). Haruhikokuroda, Bank of Japan Governor shocked markets by raising the 10-year yield cap to double. This caused a spike in the yen and a drop in government bonds. This move helps pave way for possible policy normalization.

Bloomberg Most Read

The BOJ will now allow Japan’s 10-year bond yields to rise to around 0.5%, up from the previous limit of 0.25%, according to a policy statement Tuesday.

While the central bank claimed that the move would improve the sustainability its monetary ease, economists believe the move is a way to lay the groundwork for the end of ten years of extraordinary stimulus policy.

The 10-year yield target of the central bank was kept at zero percent. It also maintained its short-term interest rates at -0.1%. The central bank also stated that it will significantly increase its bond purchases by 9 trillion yen ($67.5 million) per month, compared to the current 7.3 trillion.

The yen rose to 133.11 against a dollar, as opposed to 137.16 before the announcement. After the announcement, the 10-year yield rose to 0.46% from 0.25%.

Afternoon trading saw Japanese bank stocks rise as investors anticipated better earnings from financial institutions. Mitsubishi UFJ Financial Group Inc. soared as high as 9.6% in afternoon trading, the highest level in six years. Mizuho Financial Group Inc. also soared.

The ripple effects extended far beyond Japan with US stock-index futures falling and Treasury yields rising.

Learn more: Global Markets are Jolted by BOJ Surprises with Yield Policy Modification

All 47 economists polled by Bloomberg before the decision were blindsided. Although most economists agreed that the bank should do more for the bond market’s functioning, few expected any changes in December.

The story continues

The surprise decision has the potential to send shockwaves through global financial markets as the BOJ’s steadfast commitment to defending its 10-year yield cap has served as an anchor indirectly helping keep borrowing costs low around the world.

“This is a total surprise. As the market focus has been on the joint accord with the government and people let their guards down, the BOJ pushed through this adjustment,” said Mari Iwashita, chief market economist at Daiwa Securities Co. “Its surprise impact will be strong for the yen and stocks.”

In the days leading up to the BOJ gathering speculation was focused on the possible direction of policy following Kuroda’s departure.

Prime Minister Fumio Kishida is planning on revising a decade-old accord with the BOJ and will consider adding flexibility to the agreement’s 2% price goal, local media reported over the weekend. Bloomberg reported that a key aide to Kishida had told Bloomberg earlier in the month that there was a possibility of a new agreement with the central bank.

Analysts and investors were not interested in developments outside the yield band because of these reports. The 2013 joint statement is seen as a fundamental component of Japan’s push to escape from deflation orchestrated by former Prime Minister Shinzo Abe and put into action by Kuroda, his handpicked BOJ chief.

In recent months, the governor had repeatedly stuck to a resolutely dovish stance by stressing the need for stimulus until stronger wage growth takes place, ruling out the possibility the BOJ will take action against the yen’s slump.

He had also said that any movement outside the yield target band would be interpreted as a rate increase, which led many economists believe that such a move is still some time off. In this sense, his sudden action is a cause for fresh criticism about the credibility and reliability of his explanations.

Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official, said he was surprised that Kuroda was willing to take another possible hit to his reputation and risk coming out as “the bad guy.”

“Whatever the BOJ calls this, it is a step toward an exit,” said Adachi. “This opens a door for a possible rate hike in 2023 under a new governorship.”

Even if Kuroda’s main intention was to extend the lifespan of the BOJ’s stimulus framework, economists largely agreed that the move presaged further change under a new leadership.

“I think the central bank is still getting closer to conducting a review. With the BOJ holding more than 50% of bonds it’s clear that it’s difficult to continue with the current policy,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “It’s also time to take another look at the joint statement with the government.”

–With Yuko Takeo’s and Yoshiaki Nohara’s assistance.

(Additional comments by economists

Bloomberg Businessweek: Most Read

©2022 Bloomberg L.P.