Bank of Japan Shifts Monetary Policy Amid Global Rate Hikes

The world’s leading central banks have had a significant week, with the Bank of Japan (BOJ) participating in the commotion following further rate hikes in the U.S. and Europe. As historic inflation surges, the BOJ has been “the anomaly” among these global financial entities by maintaining an uncomplicated monetary policy with its so-called Yield Curve Control. It stands out as the only notable central bank still maintaining negative rates. However, looming price pressures, impacts on its balance sheet, and long-term easing side effects, such as the weakening of the yen, necessitate a change in this stance.

Moving Towards Normalization

In December, the BOJ began to broaden its boundaries, which led to a rise in Japan’s 10-year bond yields to approximately 0.5%, a significant leap from the previous upper limit. Building upon these steps, the central bank has retained the target for the 10-year JGB yields at around 0%. However, its 0.5% cap on yield movements is now merely a “reference” and not a strict limit. The bank plans to purchase Japanese government bonds in fixed-rate operations, thereby setting a new upper limit for the 10-year yield at 1%.

Kit Juckes, chief FX strategist at Societe Generale, stated, “Yield curve control is a perilous policy which needs to be phased out as soon as possible.” He added that the policy has contributed significantly to the yen’s historic low level, and hence the BOJ aims to dismantle it carefully. Juckes also anticipates a slow rally for the yen in alignment with this move.

Impact on the Market

The timing of these changes appears sensible given the stabilization following the U.S. regional banking crisis, and with an aggressive hiking cycle nearing its end. Despite this, markets struggled to find a clear direction, with the Nikkei 225 Index slumping to a session low of 2.6% before eventually finishing the day down by 0.5%. The yen also experienced volatility following the news, fluctuating between ¥138.6 and ¥140.4 against the dollar. The benchmark 10-year JGB bond yield increased to its highest level since September 2014 at 0.575%, before ultimately subsiding.