The Bank of Japan (BOJ) shocked global markets overnight with an unannounced change to its bond yield control that would now allow long-term interest rates to continue to rise, a move that many see as aimed at easing some of the costs of prolonged monetary stimulus in Japan.
Shares experienced a steep decline while the yen and bond yields rose following the decision, which caught some investors off-guard who had expected the BOJ to make no changes to its yield curve control (YCC) until Governor Haruhiko Kuroda steps down in April of 2023. The BOJ decided to allow the 10-year bond yield to move 50 basis points either side of its 0% target, wider than the previous 25 basis point previously allowed. But the central bank kept its yield target unchanged and said it will sharply increase bond buying, a sign the move was a fine-tuning of existing ultra-loose monetary policy rather than a withdrawal of stimulus.
"Today's step is aimed at improving market functions, thereby helping enhance the effect of our monetary easing. It's therefore not an interest rate hike," Kuroda told a news conference. "This change will enhance the sustainability of our monetary policy framework. It's absolutely not a review that will lead to an abandonment of YCC or an exit from easy policy."
The BOJ also stated that it plans to increase monthly purchases of Japanese government bonds to 9 trillion yen ($67.5 billion) each month from the previous 7.3 trillion yen each month. Kuroda stressed the move was not a sign of bigger tweaks to come to YCC and an eventual exit from ultra-easy policy, sticking to his view that Japan's fragile economy still needed support.
"Maybe this is a baby step to test out the strategy and see what the market reaction is, and how much it's reacting," Bart Wakabayashi, branch manager at State Street in Tokyo, told Reuters. "I think we're seeing the first toe in the water."