Unprecedented Investment Shake-Up Unleashed After Bank of Japan’s Game-Changing Move!

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Japanese government bond yields rose on Monday as global debt, currency and equity markets began to absorb a historic move by the Bank of Japan to allow yields to rise more freely.

Analysts said BoJ Governor Kazuo Ueda’s decision to ease the central bank’s grip on long-term bond yields marked a significant step towards ending decades of ultra-loose monetary policy. The benchmark yield on 10-year JGB rose to a nine-year high on Monday.

THE shock decisionwhich the BoJ denied represented a change in policy, amounted to suspending a controversial seven-year monetary experiment known as yield curve control that alienated Japan’s central bank from global peers, analysts said.

Ueda’s move, which initially aroused doubts among investors and was defined as “opaque”, in fact widened the range within which 10-year bonds JGB extension yields would be allowed to move to 1 percent from 0.5 percent. The bank added that it will officially keep its 0.5% cap on yields as a “benchmark”.

“This is the ‘de facto’ abolition of yield curve control, at least for now,” Masamichi Adachi, UBS’s chief Japanese economist, wrote in a report. “No introduction of policy rate guidance suggests that the bank has left open the option to raise short-term policy rates.”

The decision paved the way for a potential change in Japan’s status and fundamental changes in global investment flows. The practical end of yield curve controls marked what investors termed a definitive step toward policy normalization after decades of deflation and economic stagnation and seven years of negative interest rates.

“What is clear to us is that with today’s change there will be a repatriation of overseas money to Japan, which will also affect shares,” said Luca Paolini, chief strategist at Pictet. “Japan is ending deflation, so Japan becomes a more normal place to invest.”

But veteran BoJ observers warned against concluding that the central bank was on the verge of tightening. The yield band easing was meant to signal concern to markets about the increased risk of inflation and the long-term distortion of bond markets.

The BoJ added on Friday that its overnight interest rate will remain below 0.1% (Japan is the only country in the world to maintain negative rates), while calling for more time to stabilize at its 2% inflation target.

“Does it portend full-blown tightening? Almost certainly not,” said Peter Tasker, co-founder of Arcus Investments. “So as long as rates are negative in the short term, there is a limit to how much the 10-year yield can increase,” Tasker added.

The 10-year JGB yield rose to a nine-year high of 0.607% on Monday before falling to 0.59% after the BoJ announced unscheduled purchases of ¥300 billion ($2.1 billion) in government bonds five to 10 years. The yield climbed as high as 0.572% on Friday, also a nine-year high.

However, analysts said the yield was unlikely to breach the new 1% ceiling.

Most pundits don’t expect the BoJ to abandon negative interest rates until next year, when the central bank has forecast inflation to fall below its 2% target. Headline inflation hit 3.3% in June and the BoJ on Friday updated its core inflation projection for fiscal 2023 from 1.8 to 2.5%, while lowering its forecast for the fiscal year 2024 at 1.9%.

Ueda also said the recent volatility of the yen against the dollar played a role in the BoJ’s decision. Some analysts said this statement – the first recognition linking recent currency weakness to a shift in yield curve controls – could create significant market uncertainty about the possibility of political intervention on the level of the yen.

“It’s not good if there is any suspicion that the BoJ is responding to government complaints that it doesn’t want the weaker yen,” said Tetsuya Inoue, a former BoJ official who is now a senior research scientist at the Nomura Research Institute.

Several currency analysts argued that while the psychological significance of the BoJ’s move was high, it was unlikely to trigger a major investor rethink on the yen, expecting a brief bout of currency volatility but no lasting change in currency weakness. After Friday’s turmoil, the yen entered the weekend around ¥141 against the dollar, roughly its level before the BoJ decision.

Kamakshya Trivedi, a currency strategist at Goldman Sachs who described Ueda’s move as a “leapfrog” for the BoJ but only a “small step” for the yen, said that while the currency could soar higher in the coming days as the market explores central bank flexibility metrics, lasting appreciation probably wasn’t in the cards.

“It would take a more substantial policy turnaround to offset stronger global risk sentiment, which tends to weigh on the yen, and the rate differential makes it unlikely that this will require a significant repatriation of Japanese assets,” Trivedi wrote in a report ai clients .

Ueda stressed that the BoJ intends to support easing measures as it determines whether recent wage hikes will continue into next year.

Robert Tipp, chief global investment strategist and head of global bonds for PGIM Fixed Income, said the central bank was buying time. “He wants to see if wage growth is organic or the result of pressure from the government,” he said.