{"id":41747,"date":"2023-07-28T17:13:49","date_gmt":"2023-07-28T21:13:49","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/what-the-bank-of-japans-policy-tweak-means-for-markets\/"},"modified":"2023-07-28T17:13:51","modified_gmt":"2023-07-28T21:13:51","slug":"what-the-bank-of-japans-policy-tweak-means-for-markets","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=41747","title":{"rendered":"What the Bank of Japan\u2019s policy tweak means for markets"},"content":{"rendered":"
\n

It was a development that seemed to come out of nowhere on Thursday, nudging 10- and 30-year Treasury yields above 4% and taking the steam out of U.S. stocks despite a round of resilient economic data.<\/p>\n

A news report by Nikkei about a likely tweak to the Bank of Japan\u2019s yield-curve control was all it took for investors to realize that the world\u2019s last remaining floor on interest rates might be shifting. The BoJ followed through on Friday, by switching to a more flexible policy that enables the country\u2019s 10-year yield BX:TMBMKJP-10Y to rise above the 0.5% upper cap that\u2019s been in place since December.<\/p>\n

In response, 10-year yields across the world moved slightly higher on Friday, with most of them finishing with small weekly advances, according to Tradeweb. Some of the knock-on effects of the BoJ\u2019s decision are likely to include upward pressure on global government-bond yields, an appreciating yen, and less reason to own Treasurys relative to Japanese bonds, said Thomas Mathews, a London-based senior markets economist for Capital Economics.<\/p>\n

\n
<\/p>\n
<\/p>\n<\/figure><\/div>\n

\u201cThe\u00a0Bank\u00a0of\u00a0Japan\u00a0seems to have effectively ended\u00a0yield curve control without making a big splash\u00a0in\u00a0financial markets\u201d on Friday, \u201cbut we wouldn\u2019t rule out further effects \u2014 on\u00a0Japan\u2019s markets and those around the world \u2014 just yet,\u201d Matthews wrote in a note.<\/p>\n

Yield-curve control, which was enacted in 2016, has been the BoJ\u2019s way of heading off deflation risks and stimulating Japan\u2019s economy by encouraging consumers and businesses to spend and invest. By pinning the yield on 10-year government bonds to around zero, the idea was that the bank would purchase any outstanding bonds at a price consistent with that target on days when private investors were unwilling to do so. Meanwhile, Japanese policy makers have left their short-term policy rate unchanged at minus 0.1% for seven years. <\/p>\n

Now that inflation has taken hold around much of the world, including Japan, the BoJ is being forced to loosen its grip on interest rates, suggesting the world\u2019s last dovish bastion is about to go in a more hawkish direction. Though Gov. Kazuo Ueda said Friday\u2019s adjustment doesn\u2019t mean a shift away from the central bank\u2019s easy-money stance, investors aren\u2019t so convinced. For now, the BoJ is relying on its upper 0.5% cap on Japan\u2019s 10-year yield as a suggestion, not a limit, and said it will purchase bonds at a 1% yield every business day, essentially doubling the range in which the long-term rate can move. <\/p>\n

\u201cFor so long, Japanese government bonds have been totally anchored, acting as a floor for rates worldwide. The BoJ, which is the biggest holder of Japanese government bonds, has kept short-term rates incredibly low while allowing yield-curve control to impact longer-term rates,\u201d said Will Compernolle, a macro strategist at FHN Financial in New York. <\/p>\n

Replacing a rigid boundary on Japan\u2019s 10-year yield with a wider range \u201cintroduces an ultra-safe asset into global financial markets with slightly higher yields, and suggests there may be a change in policy in a more hawkish direction down the line,\u201d Compernolle said via phone. \u201cThe idea that even the BoJ is getting slightly more hawkish really represents a new phase for central banks, and shows that Ueda is not the same as his predecessor.\u201d<\/p>\n

Japan is by far the biggest major foreign holder of Treasury securities, owning more than $1 trillion as of May, followed by mainland China and the U.K., based on the most recent data from the U.S. Treasury Department. Mathews of Capital Economics estimates that Japanese residents account for about 15% of the foreign holdings.<\/p>\n

A slightly higher yield on Japan\u2019s government debt now makes it incrementally more attractive relative to that of the U.S., analysts said \u2014 which is what had U.S. markets so rattled on Thursday. Bond investors sold off Treasurys late Thursday, sending the 10-year U.S. yield to an almost two-week high and the 30-year bond yield to its highest since November. The rise in yields was powerful enough to knock all three major stock indexes
\n DJIA,
\n +0.50%<\/bg-quote><\/p>\n

SPX,
\n +0.99%<\/bg-quote><\/p>\n

COMP,
\n +1.90%<\/bg-quote>
\n into lower finishes and put an end to a 13-day winning streak in Dow industrials. <\/p>\n

\u201cAs the last dovish central bank standing, the developments in Tokyo overnight present yet another piece of information that adds to the increasingly restrictive monetary policy backdrop on a global level,\u201d said BMO Capital Markets strategists Ben Jeffery and Ian Lyngen.<\/p>\n

Treasurys \u201care not the sole flight-to-quality instrument,\u201d they said in a note. And \u201cnow one needs to take into account the global backdrop when contemplating where 10s [the 10-year U.S. yield] should trade.\u201d<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

It was a development that seemed to come out of nowhere on Thursday, nudging 10- and 30-year Treasury yields above 4% and taking the steam out of U.S. stocks despite a round of resilient economic data. A news report by Nikkei about a likely tweak to the Bank of Japan\u2019s yield-curve control was all it […]<\/p>\n","protected":false},"author":1,"featured_media":41748,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-41747","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nWhat the Bank of Japan\u2019s policy tweak means for markets | iFintechWorld<\/title>\n<meta name=\"description\" content=\"It was a development that seemed to come out of nowhere on Thursday, nudging 10- and 30-year Treasury yields above 4% and taking the steam out of U.S.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=41747\" \/>\n<meta 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