BOJ shifts yield curve control, shakes markets with surprise monetary policy


The Bank of Japan shocked markets on Tuesday by making a surprise change in its bond yield controls, allowing long-term interest rates to rise further, aimed at easing some of the lingering monetary stimulus costs.

Stocks fell, while the yen and bond yields rose following the close, which caught off with investors expecting the BOJ to make no changes to its yield curve control (YCC) until Governor Haruhiko Kuroda steps down in April.

In a move aimed at breathing life back into a dormant bond market, the BOJ decided to allow the 10-year bond yield to move 50 basis points either side of its 0% target, wider than the previous 25 basis point band.

But the central bank kept its yield target unchanged and said it would sharply increase bond purchases, a move that signaled a fine-tuning of existing ultra-loose monetary policy rather than a withdrawal of stimulus.

“Maybe this is a baby step to test the strategy and see what the market’s reaction is and how much it reacts,” said Bart Wakabayashi, branch manager at State Street in Tokyo. “I think we’re seeing the first toe in the water.”

At the two-day policy meeting that ended on Tuesday, as widely expected, the BOJ kept its YCC targets unchanged, set at -0.1% for short-term interest rates and zero for 10-year bond yields.

The BOJ also said it would increase monthly purchases of Japanese government bonds (JGBs) to 9 trillion yen ($67.5 billion) per month from 7.3 trillion yen previously.

“Through these steps, the BOJ aims to achieve its price target by improving the sustainability of demonetization under this framework,” the BOJ said in a statement, adding that the move is aimed at prolonging rather than phasing out the YCC.

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The Nikkei 225 fell 2.5% after the result, while the dollar fell 2.7% to a four-month low of 133.11 yen. The 10-year Japanese government bond ( JGB ) briefly rose to 0.460%, close to the BOJ’s newly set implied cap.

Already, with Kuroda’s term winding down and inflation expected to remain above its 2% target until next year, markets are guessing what the BOJ’s next move will be.

“They’ve widened the band, and I think it came earlier than expected. It raises questions about whether this could be a harbinger of more to come in terms of policy normalization,” said Bank of Singapore currency strategist Moh Cheong Sim.

“The writing is on the wall, and perhaps the sharp yen weakness we’ve seen earlier is unsettling for policymakers … It’s clear that this adds to the yen strength story next year.”

The BOJ’s ultra-low rate policy and its relentless bond-buying to protect yields fueled public criticism for triggering an unwelcome yen fall that distorted the yield curve, reduced market liquidity and raised the price of raw material imports.

Kuroda has repeatedly said there is no need for the BOJ to overhaul the YCC, including taking immediate steps to address side effects such as the distortion it creates in the bond market.

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