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Bank of Japan unleashes bond shift, shocking the market

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December 20, 2022

The Bank of Japan, a central bank, shocked the market by changing its yield curve control policy for 10-year government bond yields. With this change, the bonds will move 50 basis points either side of a 0% target, up from 25 points. This is a major difference from other central banks, which have increased rates and tightened their monetary policies to combat inflation, according to a CNBC report.

The change caused both the Japanese yen and bond yields to rise, while stocks in Asia-Pacific fell. In particular, the U.S. dollar was down 3.3% against the yen. U.S. Treasury yields of 10-year notes also climbed to just shy of 3.66%.

The bank said in a statement that the move will, "improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions."

Analysts suggest the Bank of Japan may be "testing the water."

"The decision is being read as a sign of testing the water, for a potential withdrawal of the stimulus which has been pumped into the economy to try and prod demand and wake up prices," Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, told CNBC. "But the Bank is still staying firmly plugged into its bond purchase program, claiming this is just fine tuning, not the start of a reversal of policy."

This policy may also be an effort to combat market volatility, which the bank said has impacted bond markets.

"The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets," the bank told the news outlet.