Japan yields hit 9-year high, yen gains after 'stealth' BOJ policy shift

JAPAN’S benchmark bond yield soared to a nine-year high and the yen rallied after the Bank of Japan’s decision on Friday (Jul 28) to conduct its yield curve control (YCC) policy more flexibly.

The BOJ maintained guidance allowing the 10-year yield to move 0.5 per cent around the 0 per cent target, but said those would now be “references” rather than “rigid limits”.

To drive the point home, in a second fixed rate bond-buying operation on the day, the central bank offered to purchase the 10-year note at a yield of 1.0 per cent, instead of the previous rate of 0.5 per cent.

“By raising the upper limit for the fixed rate operations to 1 per cent, the BOJ effectively widened the 10-year target band,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

“It made a stealth move in that sense.”

Policymakers left the short-term interest rate target at -0.1.

The 10-year JGB yield spiked to 0.575 per cent for the first time since September 2014 before easing slightly to 0.55 per cent.

The yen, which swung violently immediately after the announcement as traders struggled to fully assess its implications, eventually extended gains against the dollar to be up as much as 1.05 per cent at 138.05. It had initially flipped to a 1.2 per cent loss, sliding as far as 141.20.

The Nikkei share average pared the morning’s losses with the BOJ’s announcement coming just before trading resumed after the midday recess, but then extended losses to be down as much as 2.6 per cent. As of 0452 GMT, it was about 1.9 per cent lower at 32,273.52.

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The Tokyo Stock Exchange’s banking index, however, surged on the prospect of a steeper yield curve, which would revive profit from lending. The index gained as much as 4.6 per cent to reach an eight-year high and was last up 4.2 per cent.

The BOJ has been under pressure from investors to allow yields to rise all year, with wages and inflation rising. Data released on Friday showed core consumer inflation in Japan’s capital slowed in July but remained well above the central bank’s 2 per cent target.

“Even though market reaction is choppy, this is a clear sign that the BOJ will take mini steps to tighten policy if inflation pressures remain,” said Charu Chanana, a strategist at Saxo Markets in Singapore.

“Effectively, markets will test the 1 per cent cap, and that can be bullish for the yen.” REUTERS