As the developed world’s final holdout for rock-bottom interest rates approaches policy normalization, the Bank of Japan’s surprising hawkish shift sent shockwaves through global markets. The yen rose after the BOJ raised its cap on benchmark 10-year yields to roughly 0.5% from 0.25%. This startled every economist polled by Bloomberg as Japanese government bonds and Treasuries fell. The stock index futures in the United States, as well as the Australian dollar and gold, were all affected by the fallout.
On Tuesday, the turbulence is unlikely to subside. Tightening domestic financial conditions may result in a wave of capital returning home, making Japan the world’s biggest debtor. At a time when the economy is weakening, this poses a danger of asset prices dropping and worldwide borrowing costs rising.
Government Bonds Worldwide in Serious Trouble
According to UBS Group AG, bondholders in the US, Australia, and France are likely to sell their holdings. Equity prices in developed markets are also likely to fall. Among those that will benefit from the BoJ’s decision are the Swiss bank’s asset management arm, Schroders Plc, and BlueBay Asset Management.
The most among core markets in the area, the yield on French 10-year bonds climbed 9 points to 2.81%. The notes are on track for their longest losing streak since early September, as German equities declined for the fifth day.
Before retreating to 0.4%, the BOJ announced unscheduled debt-purchase operations, which raised Japan’s benchmark 10-year yield by up to 21 bps to 0.46%. When Japanese bond futures breached a circuit breaker threshold, the Osaka Exchange briefly halted trading. The yen rose to 132 per dollar, up 3.6%.
Further widening of the yield band isn’t required. The change in yield-curve management is likely to be beneficial for the economy, according to BOJ Governor Haruhiko Kuroda.
The policy shift was prompted by Japan’s core inflation reaching a four-decade high. This bolstered the case for cuts in central bank stimulus. The BOJ’s decade-old agreement on the 2% inflation target was reported to be changing by Kyodo news on Monday. This caused the markets to jolt.