An Unexpected Shift in Bond Yields by the Bank of Japan Shocks Global Markets

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Global markets were thrown into disarray and confusion overnight after the Bank of Japan (BOJ) made a surprise announcement, adjusting its long-standing target range for 10-year Japanese government bond yields.

This was seen as a shift away from the central bank’s traditional policy of keeping yields near zero and sparked a sell-off in both bonds and stocks across the globe.

The Bank of Japan’s surprise announcement to adjust its long-standing target range for 10-year Japanese government bond yields caught markets off guard. In what was seen as a shift away from the central bank’s traditional policy of keeping yields near zero, the bank tweaked its yield curve control (YCC) policy to allow the yield on the 10-year Japanese government bond (JGB) to move up or down by as much as 50 basis points.

“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,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

The Bank of Japan’s decision to adjust its long-standing target range for 10-year Japanese government bond yields was an attempt to tackle its prolonged period of economic stagnation, as the central bank had introduced its yield curve control mechanism in September 2016. This policy was designed to help get inflation closer to its target rate of 2%.

It was a bold move and one that has caused confusion and disruption in global markets. It will be interesting to see how this move plays out over time as other central banks worldwide continue to take more aggressive measures to control their inflation rates.

The BOJ’s experiment with yield curve control may ultimately prove successful or act as a warning sign for others considering similar policies.

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