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Bank of Japan shocks global markets with bond yield shift


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The Bank of Japan on Tuesday shocked global markets by widening the target range for its 10-year government bond yield.

Kazuhiro Nogi | Afp | Getty Images

Global markets were jolted overnight after the Bank of Japan unexpectedly widened its cap on 10-year Japanese government bond yields, sparking a sell-off in bonds and stocks around the world.

The central bank caught markets off guard by tweaking its yield curve control (YCC) policy to allow the yield on the 10-year Japanese Government Bond (JGB) to move 50 basis points either side of its 0% target, up from 25 basis points previously, in a move aimed at cushioning the effects of protracted monetary stimulus measures.

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In its policy statement, the BoJ said the move is intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.”

The central bank introduced its yield curve control mechanism in September 2016, with the intention of lifting inflation towards its 2% target after a prolonged period of economic stagnation and ultra-low inflation. The introduction of YCC came after the Bank ran out of bonds to buy as part of its quantitative easing efforts, and was also response to yield curve distortions arising from negative rates.

The BoJ — an outlier compared with most major central banks — left its benchmark interest rate unchanged at -0.1% and vowed to significantly increase its rate of 10-year government bond purchases, retaining its ultra-loose monetary policy stance. In contrast, other central banks around the world are continuing to hike rates and tighten monetary policy aggressively in an effort to rein in sky-high inflation.

The YCC change prompted the Japanese yen and bond yields around the world to rise, while stocks in Asia-Pacific tanked. Japan’s Nikkei 225 was down 2.5% on Tuesday afternoon. The 10-year JGB yield briefly climbed to over 0.43%, its highest level since 2015.

U.S. Treasury yields spiked, with the 10-year note climbing by around 7 basis points to exceed 3.66% and the 30-year bond rising by around 9 basis points to 3.7%. Yields move inversely to prices.

Shares in Europe also retreated at the open, with the pan-European Stoxx 600 shedding 1% in early trade before recovering slightly. European government bonds also sold off, with Germany’s 10-year bund yield adding almost 9 basis points to 2.2840%.

‘Testing the water’

Spikes in volatility

The Bank of Japan noted in its statement that since early spring, market volatility around the world had risen, “and this has significantly affected these markets in Japan.”

“The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets,” it added.

The central bank said if these market conditions persisted, it could have a “negative impact on financial conditions such as issuance conditions for corporate bonds.”

“The Bank expects that the measures decided today will facilitate the transmission of monetary easing effects generated under the framework of yield curve control, such as through corporate financing,” it said.

“The Bank will aim to achieve the price stability target by enhancing the sustainability of monetary easing under this framework through implementing these measures.”

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