Yen Soars After Bank of Japan Mini Pivot Widens Yield Curve Control Band

The Bank of Japan as widely expected kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield. However, the market was shocked with Bank of Japan Gov. Haruhiko Kuroda adjusting the central bank’s yield curve control program with saw yields rise sharply and a similar move in the yen. Dollar Yen went from 137.20 to 133.20 on the announcement. 10-year JGB yields surged to 0.455%, the highest since 2015 leading to a limit down halt on the Osaka Exchange.

The Bank of Japan will review its operation of yield curve control. The BoJ will expand the band around its 10-year yield target to 0.5% above and below (from 0.25). They will increase bond purchases to JPY 9 tln a month in Q1

The move follows the Federal Reserve raising rates 50bps last week, which increased the interest rate differential between the U.S, and Japan. The YCC surprise partially addressed the positioning there in the forwards.

 BoJ Chief Kuroda

BOJ December 2022 Monetary Policy Decision Statement

BOJ Monetary Policy Highlights

  • Bank of Japan short-term interest target kept at -0.1%
  • 10-year JGB yield target remains around 0%
  • The BOJ adjusted its yield curve control program to now allow for 10-year bond yields to target a band in and around 0.50% (doubling the previous band of 0.25%).
  • Yield curve control (a unanimous vote)
  • Markets did not expect the move, not at least until Kuroda’s term is up next year.
  • BoJ will increase bond purchases to JPY 9 tln a month in Q1
Yen Soars on BoJ YCC Pivot

Governor Kuroda’s decade-long term will be up in April and a successor is expected to be announced early next year. That coincides with annual Spring labor-management wage negotiations that may finally deliver the missing ingredient to durable achieving the BoJ’s 2% inflation target.

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to
modify the conduct of yield curve control in order to improve market functioning and
encourage a smoother formation of the entire yield curve, while maintaining accommodative
financial conditions.

Inflation is running at nearly double the BoJ’s 2% inflation target (3.7% y/y) with a November update due on Wednesday evening. Given that the surprise is explainable except that Kuroda has downplayed the sources of this inflation as incompatible with durably achieving the central bank’s inflation target given its transitory drivers including yen depreciation plus food and energy price inflation in the absence of stronger wage growth. Real wages continue to be crushed.

Conduct of yield curve control

While significantly increasing the amount of JGB purchases, the Bank will expand the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points.

The Bank will offer to purchase 10-year JGBs at 0.5 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted. In order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, the Bank will make nimble responses for each maturity by increasing the amount of JGB purchases even more and conducting fixed rate purchase operations.

Source: BoJ

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