THE BANK of Japan’s (BoJ) surprise policy shift is sending shock waves through global markets that may just be getting started, as the developed world’s last holdout for rock-bottom interest rates inches toward policy normalization.
Japanese government bonds and Treasuries both slumped on Tuesday while the yen soared after the BoJ lifted the cap on benchmark yields to around 0.5% from 0.25%, surprising every economist surveyed by Bloomberg. The fallout touched everything from US stock-index futures to the Australian dollar and gold.
The turbulence is unlikely to end on Tuesday. Japan is the world’s largest creditor, and tightening domestic financial conditions could result in a wave of capital returning home. That threatens to add downward pressure on asset prices and boost global borrowing costs at a time when the economic outlook is darkening. Investors are expected to exit bonds in the US, Australia and France, according to UBS Group AG, with developed-market equities also likely to weaken.
“This was bound to happen with inflation rising in Japan, it’s just happened sooner than many thought,” said Amir Anvarzadeh, an analyst at Asymmetric Advisors who has closely tracked Japanese markets for three decades. “It could spark money flowing back into Japan — it will force Japanese investors to raise the hedging on their dollar exposure, which in turn strengthens the yen and becomes a self-fulfilling prophecy of more yen strength.”
Japan’s benchmark 10-year yield surged as much as 21 basis points to 0.460% before paring the move on the BoJ’s unscheduled debt-purchase operations. The exchange briefly halted trading of bond futures as a slide hit a circuit breaker threshold.
The yen soared almost 3% to 133.11 per dollar while the Nikkei 225 Stock Average slumped as much as 3%.
For some analysts, the market reaction was misplaced. BoJ Governor Haruhiko Kuroda is likely to make clear in a briefing later Tuesday that the move is intended to improve the bond market’s functioning, instead of tightening monetary policy, according to Daisuke Karakama, chief market economist at Mizuho Bank.
“FX markets seem to want to take it as BoJ’s pivot, which I do not think so,” said Mr. Karakama.
The adjustment comes as a rise in Japan’s core inflation to a four-decade high bolstered the case for a reduction in central bank stimulus. Speculation of a shift had jolted markets on Monday after Kyodo news reported that Prime Minister Fumio Kishida was planning to revise a decade-old accord with the BoJ on the 2% inflation goal.
“The BOJ action is unequivocally negative for global bonds,” TD Securities strategists including Mitul Kotecha wrote in a research note. “If today’s move was the first step toward the end of YCC, suggesting that the yen could appreciate materially from here, Japanese investors may start to sell some of their FX unhedged global bond holdings. This will be more bearish for the long end of US and European bond curves.” — Bloomberg
