Last Man Standing
The Credit Strategist Blog
In a move that surprised markets, the Bank of Japan (BOJ) tightened policy by doubling the 10-year Japanese Government Bond (JGB) yield cap to 0.5% from 0.25% - stepping away from the yield-curve control policy it adopted in 2016 to keep its 10-year yield at zero. This was not expected to happen until next April when BOJ chief Kuroda steps down. Global market reaction was swift with 10-year JGB yields jumping 15 basis points to just under 40 basis points, the sharpest one-day surge since 2003.
Japan also said it is increasing the pace of quantitative tightening in order to try to manage market distortions. The JGB market is highly dysfunctional with extremely limited liquidity and trading due to many factors including the BOJ’s ownership of a huge percentage of outstanding bonds (if you want to consider them “outstanding” if the government owns them). Japan has been dealing with a falling yen as a result of its stubborn adherence to yield curve control which is one reason why many observers expected the policy to be changed in April. Now that the change happened earlier, markets have another tightening force to contend with sooner than expected.
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