World markets taken by surprise as Bank of Japan shifts bond yields

Markets were taken aback as the Bank of Japan (BOJ) modified its yield curve control (YCC) strategy. The bank permitted the yield on the 10-year Japanese government bond to swing 50 basis points either side of its 0% objective.

The BOJ stated that the action is meant to “improve market functioning and encourage a smoother formation of the entire yield curve while maintaining accommodative financial conditions.” After an extended period of economic stagnation and extremely low inflation, the central bank implemented its yield curve management mechanism in September 2016 with the goal of lifting inflation toward its 2% target.




On Tuesday, the BOJ while maintaining its ultra-loose monetary policy stance, also kept its benchmark interest rate at -0.1%. The bank promised to dramatically speed up the pace at which it buys 10-year government bonds. In contrast, other central banks around the world are still raising rates and forcefully tightening monetary policy in an effort to control sky-high inflation.

The YCC adjustment caused bond yields and the yen to soar globally while Asian stock markets collapsed. The Nikkei 225 in Japan experienced a 2.5% decline on Tuesday. For a brief period, the 10-year JGB yield increased to above 0.43%, its highest level since 2015.

The U.S dollar was down 3.3% against the rising yen by mid-afternoon in Europe. According to FactSet currency statistics, the yen's advance saw its largest one-day gain versus the U.S. dollar since March 1995.
If these market conditions are maintained, the central bank warned that it may have a "negative impact on financial conditions, such as the issuance conditions for corporate bonds."

FAQs:

1. What is bond yield?
   Bond yield is the profit an investor makes from a bond investment. Bonds can be bought for more than their face value, known as a premium, or for less than their face value, known as a discount. Divided by the bond's market price, the current yield represents the bond's coupon rate.
2. Why was bond yield implemented?
   After an extended period of economic stagnation and extremely low inflation, the central bank implemented its yield curve management mechanism in September 2016 with the goal of lifting inflation toward its 2% target.