Global Markets Jolted as BOJ Surprises With Yield Policy Change

(Bloomberg) — The Bank of Japan sent shock waves through markets after it unexpectedly revised its yield-curve-control policy, signaling that the developed world’s last holdout to rock-bottom interest rates is inching toward policy normalization.

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The yen soared almost 3% to 133.11 per dollar, while yields on 10-year bonds surged 20.5 basis points to the highest level since 2015 after the BOJ said it would allow benchmark yields to rise to around 0.5% from its previous 0.25% range. The moves triggered a slump in Treasuries to Japanese stocks, while the Bloomberg Dollar Spot Index slid 0.7%.

Every single economist surveyed by Bloomberg had expected the BOJ to keep policy unchanged.

“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 tracked Japanese markets closely 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 turns strengthens the yen and becomes a self-fulfilling prophecy of more yen strength.”

Analysts at UBS Group AG predicted in October that bonds in the US, Australia and France would be most at risk, with losses also seen for developed market equities. An advancing yen would also weigh on shares in Tokyo.

Kuroda Shocks by Tweaking BOJ’s Yield Cap, Sparking Yen Jump

Japanese core inflation climbed to a four-decade high in October, an acceleration that backed the case for a reduction of central bank stimulus. Prime Minister Fumio Kishida is planning to revise a decade-old accord on the 2% inflation goal with the Bank of Japan, Kyodo news reported this month.

“Much of the market chatter was about a policy review next year, I don’t think anyone expecting a policy tweak expected it at this meeting which is a bit of a shocker,” said Calvin Yeoh, Singapore-based portfolio manager at hedge fund Blue Edge Advisors Pte. The move opens the door to a stronger yen and the repatriation of Treasury holdings into the JGB market.

–With assistance from Marcus Wong and Matthew Burgess.

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