While global financial markets are tightly coupled, the Bank of Japan has typically had a limited bearing on the markets. But on an otherwise quiet Friday afternoon, one sentence in its latest policy decision sent ripples through equity, foreign exchange and bond markets.
And the fact that the BoJ statement came towards the end of its typical release window had traders on even higher alert. It’s early days, but there’s a potential for some major asset price moves to occur.
The Bank of Japan on Friday loosened its yield curve control (YCC) policy, a pillar of the central bank’s efforts to limit borrowing costs and stimulate the economy.
This matters because the BoJ’s ultra-low interest rate policy was one of the few remaining forces anchoring long-term bond rates. So long as the trillions of Japanese capital could only earn 0.5 per cent on 10-year bonds, they were forced to venture to bond markets such as the United States and Australia for yield enhancement. If the BoJ is prepared to loosen that peg, the implication is for other long-term bond rates to rise because Japanese demand for foreign bonds will reduce by the higher rate.
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