BOJ loosens grip on long-term yields in Kazuo Ueda’s first surprise

BOJ loosens grip on long-term yields in Kazuo Ueda’s first surprise

The Bank of Japan jolted financial markets by loosening its grip on bond yields in Governor Kazuo Ueda’s first surprise move since taking the helm. The yen gave back some of its earlier sharp gains against the dollar.

The BOJ kept the target for 10-year government bond yields at around 0% but said its 0.5% ceiling on yield movements was a reference point not a rigid limit. The bank left its short-term negative interest rate unchanged at -0.1%.

The continuation of the main policy settings will likely enable Ueda to argue that the new guidance on the band was a technical move aimed at improving the sustainability of its stimulus, rather than a step toward imminent policy normalization.

The yen dropped sharply against the dollar following the decision, to pare after earlier large gains following an earlier Nikkei report that said the BOJ’s board would discuss whether to tweak yield curve control policy to let long-term interest rates rise above its 0.5% cap by “a certain degree.”

Only 18% of 50 economists polled by Bloomberg were expecting a YCC tweak at this meeting, though about half foresaw such a move no later than October. In addition, there was a widespread view that any change to the program would have to come as a surprise, as any foreshadowing might trigger a massive bond sell-off, complicating the move.