On Tuesday, local time, the Bank of Japan announced after its monetary policy meeting that it would partially adjust the current ultra-loose monetary policy and expand the volatility of long-term interest rates from plus or minus 0.25% to plus or minus 0.5%. This "black swan" has shocked global investors. For a long time, investors have regarded the Bank of Japan as the last major central bank that has not given up on its long-standing ultra-low interest rate policy. How its policy turns will not only affect the global bond market, but may even further promote the development of the central bank by the Federal Reserve, the European Union, etc. Yields surged as central banks and other countries raised interest rates. And right now, the Bank of Japan's "unexpected shift" will force investors to reconsider their future strategies.
The impact of this real shift in monetary policy was immediate:
The Nikkei 225 was down 2.5% for the day.
The yield on the newly issued 10-year government bond, which is regarded as an indicator of long-term interest rates in the Japanese bond market, rose 2.5 basis points to 0.435%, a new high since July 2015.
The yen strengthened sharply against the U.S. dollar, rising to 131 yen to the U.S. dollar in intraday trading, a new high in nearly five months.
The reason for the "unexpected transformation"?
Based on the analysis of market professionals, the reasons for the sudden change of the Bank of Japan, which has long maintained a dovish stance, can be roughly attributed to the following points:
First, the Bank of Japan made a decision to "protect the yen" taking into account the exchange rate. Adjusting the band of the 10-year JGB may mean that the BoJ now favors a stronger yen (or at least is reluctant to weaken the yen further). The yen has been one of the cheapest currencies for years, with the Bank of Japan keeping interest rates below zero and capping bond yields to fight domestic deflation. That sent the yen to its weakest against the dollar earlier this year since 1990, but it rose sharply on Tuesday after the Bank of Japan decided to raise the cap on 10-year JGB yields.
Second, consider the bond market itself. As the BOJ has said, it may be the bond market itself that caused the BOJ to make this shift. The BOJ did not cite inflation as a reason for allowing JGB yields to rise to 0.5 percent in its policy statement on Tuesday, citing deterioration in the functioning of the government bond market and the gap between 10-year and other maturities. difference between. The current 10-year U.S. Treasury yield has fallen by about 65 basis points from its peak, and there is more convincing evidence that inflation is fading. If such a trend persists, this will limit upward pressure on JGB yields.
What are the possible impacts?
The Bank of Japan's move this week is set to further make U.S. government bonds and other foreign debt less attractive to Japanese investors hedging currency. That could push Japanese investors to sell bonds overseas and flow back to Japan. This will affect all foreign exchange market participants, including corporate hedging, investor hedging, speculation, and the movement of capital.
The market most affected by the adjustment of the Bank of Japan may be the U.S. Treasuries. Because for a long time before, many investors used the low-interest yen to buy U.S. bonds to earn a spread. Since the beginning of this year, due to the sharp fluctuations in bonds and exchange rates, overseas investors have continued to reduce their holdings of U.S. bonds, coupled with the reduction of the Fed’s balance sheet, the liquidity of the U.S. bond market has declined, and yields have fluctuated significantly. The YCC adjustment may attract international capital to return from U.S. debt and other non-Japanese assets, and international liquidity will further tighten, which will lead to a decline in asset prices such as U.S. debt and U.S. stocks, which may increase global systemic financial risks.
For Japan, with the restoration of the global supply chain and the tightening of dollar liquidity, the import cost of Japanese companies may decrease, the export sector may benefit from the impact of the reopening of the border policy, and Japan's foreign trade conditions may improve.
For the Chinese market, the impact of the adjustment policy of the Bank of Japan may be relatively limited. Judging from the distribution of Japan's foreign investment, Japan's investment in markets other than Europe and the United States is relatively small. The specific impact needs to be considered comprehensively by superimposing other factors.
As for the next clearer change in the monetary policy of the Bank of Japan and the market reaction, it is necessary to focus on Japanese inflation and the economic and price outlook issued by the Bank of Japan.