Bank of Japan Shocks Markets with Yield Control Change

The Bank of Japan (BOJ)shocked investors with a surprising change to a key pillar of its monetary policy, causing waves in the currency, bond and equities markets.

The Japanese central bank announced that it would loosen the tight limits it had long imposed on bond yields.This rare move is seen as a way for the BOJ to battle rising inflation and shore up a weak yen.

The yen leapt more than 4% to 131.2 to the US dollar on the news. The 10-year Japanese government bond yield surged by its highest amount in a fortnight, touching a high of 0.47%.

The BOJ’s Tuesday announcement also reverberated across other large markets: the US 10-year treasury yield climbed 0.11 percentage points to 3.69%, while the UK’s gilt yield rose by a similar amount to 3.6%. Yields rise when prices fall.

Japan’s core inflation, minus volatile food prices, has passed the BOJ’s 2% target for the seventh consecutive month, hitting a 40-year high of 3.6% in October, prompting the BOJ to promote the trading of domestic bondstospur economic activity.

Investors were caught off guard, having expected any widening of the tolerable band to be made under the new BOJ leadership from spring next year.BOJ officials said the adjustment wasratified now toaddress increased volatility in global financial markets and improve bond market functioning to enhance the sustainability of its monetary easing.