Bank of Japan eases control of bond yields, yen jumps

The Bank of Japan (BoJ) on Tuesday surprisingly eased its tight control of yields on ten-year Japanese government bonds in order to improve the functioning of the market, while still wanting to ensure accommodative financial conditions.

The BoJ will henceforth tolerate a fluctuation in these yields between -0.5% and +0.5%. It previously set a ceiling of 0.25%, despite strong upward pressure on these rates under the effect of monetary tightening in the United States and Europe.

To defend this red line, the BoJ had been regularly forced for months to buy mountains of Japanese government bonds, further inflating its already oversized balance sheet and further accentuating the distortions of the Japanese bond market.

The yen, which had fallen since March against the dollar due to increasingly divergent monetary policies between the two sides of the Pacific, jumped after the BoJ’s announcements: the greenback traded for 133.48 yen around 3:50 a.m. GMT, when it was worth more than 137 yen just before the BoJ announcements.

The Tokyo Stock Exchange also draped, its Nikkei index dropping 2.15% after 0350 GMT while it was up 0.3% before the midday break.

Most analysts and market participants did not expect the BoJ’s course to change before the end, next April, of the second and final term of its governor Haruhiko Kuroda, the very embodiment of Japan’s ultra-accommodative monetary policy. since 2013.

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The BoJ has at the same time maintained its negative interest rate of -0.1% on bank deposits with it and will continue to buy as many Japanese public bonds as necessary to maintain their yields around 0%, according to a press release.

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