After a decade-long period of monetary easing, the Bank of Japan is finally making some adjustments. The central bank surprised markets by allowing the 10-year Japanese government bond yield to rise to a nearly nine-year high. 📈
Governor Kazuo Ueda said this doesn’t mean the bank is giving up his predecessor, Haruhiko Kuroda’s, easy policy that included negative short-term rates and capping the bond yield through large government bond purchases. However, it does mean it’s giving the market more freedom to affect yields.
More specifically, it’s keeping the 0.5% yield cap on the 10-year bond and setting a new rigid limit at 1%. It hopes this new policy will “improve the sustainability of the country’s monetary easing framework.”🔺
Recently, inflation has been rising in the country. As a result, many market participants believe this is the first of more moves the Bank of Japan will make to manage prices in the year ahead.
Higher rates would certainly shake up markets, both in Japan and globally. That’s because Japan’s Yen has been a major “carry trade” for foreign investors over the last decade. Low-interest rates in Japan meant investors could sell Yen for U.S. Dollars (or other foreign currencies) and then invest in higher-yielding assets in those countries. But, that could start to slowly unwind as the cost of that trade becomes higher and domestic Japanese investments become more attractive. 💱
Ultimately, the market does expect a gradual rise in rates, especially compared to the more aggressive hiking cycles in the U.S., Europe, and elsewhere. Clearly, the Bank of Japan wants to maintain control of its bond market but is slowly allowing the free market to express its views. Otherwise, it risks inflation getting out of control.
Time will tell how it plays out. But for now, investors are taking the weekend to assess the situation and adjust their views on the country accordingly. 👀