The Bank of Japan – Japan’s central bank led by Haruhiko Kuroda – shocks the markets by announcing its intention to change the range on which it bases its yield curve control (YCC) policy.
To be precise, the BoJ will widen the range of fluctuations in 10-year Japanese government bond rates, from the current range between -0.25% and 0.25%, to the new band between -0 .5% and 0.5%.
The adjustment, according to the Bank of Japan’s press release, intends to “improve the functioning of the market and encourage a more fluid formation of the entire yield curve, while maintaining accommodative financial conditions”.
The effect of the Tokyo stock exchange, the rates of Japanese government bonds and the yen was immediate. The yen immediately appreciates against the dollar, with the USD-JPY slipping by 3%.
This is how Kuroda decides to tackle the problem of inflation in Japan for now: considering it premature to raise rates, the governor nonetheless takes the decision to give a signal to the markets, to curb the yen’s plunge.
In Japan, core inflation exceeded the Bank of Japan’s 2% target for seven consecutive months, rising to a 40-year high of 3.6% in October.
The adjustment made to the yield curve policy reveals to the markets a more hawkish Bank of Japan: and so the Tokyo stock exchange slips by around 2.5%, while the yen rises to 133 against the dollar. As far as rates are concerned, the BoJ left them unchanged at -0.1% as expected, pursuing the negative rate policy.