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The Bank of Japan shocked markets on Tuesday with an unexpected change in its bond yield controls, allowing long-term interest rates to rise further, a move aimed at easing some of the costs of prolonged monetary stimulus.

Stocks rose, while the yen and bond yields rose after the decision, which surprised investors who had expected the BOJ to make no changes to its yield curve controls (YCC) until Governor Haruhiko Kuroda steps down in April.

In a move aimed at reviving the dormant bond market, the BOJ decided to let the 10-year bond yield move 50 basis points either side of its 0% target, wider than the previous 25 basis points.

But the central bank kept its yield target unchanged and said it would sharply increase bond purchases, a sign the move was an adjustment to existing ultra-loose monetary policy rather than a withdrawal of stimulus.

“Maybe this is a baby step to test the strategy and see how the market reacts and how well it reacts,” said Bart Wakabayashi, branch manager at State Street in Tokyo. “I think we’re seeing the first toe of water.”

As widely expected, the BOJ kept its YCC targets unchanged at -0.1% for short-term interest rates and near zero for the 10-year bond yield at a two-day policy meeting that ended on Tuesday.

The BOJ also said it would increase its monthly purchases of Japanese government bonds (JGBs) to 9 trillion yen ($67.5 billion) a month from 7.3 trillion yen previously.

“Through these moves, the BOJ will aim to achieve its price objective by increasing the sustainability of monetary easing in this framework,” the BOJ said in a statement, signaling that the move was aimed at extending the YCC rather than phasing it out.

The benchmark Nikkei 225 fell 2.5% after the decision, while the dollar fell 2.7% to a four-month low of 133.11 yen. Japan’s 10-year government bond (JGB) yield briefly rose to 0.460%, close to the BOJ’s newly set implicit threshold.

Already, markets are guessing what the BOJ’s next move will be as Kuroda’s term draws to a close and with inflation expected to remain above its 2% target next year.

“They expanded the band and I guess it came sooner than expected. It raises questions as to whether this is a harbinger of policy normalization going forward,” said Bank of Singapore currency strategist Moh Siong Sim.

“The writing is on the wall that perhaps the sharp yen weakness we’ve seen in the past has been uncomfortable for policymakers … it clearly adds to the story of yen strength next year.”

The BOJ’s ultra-low interest rate policy and relentless bond purchases to protect its yields have drawn public criticism for distorting the yield curve, draining market liquidity and fueling an unwanted yen depreciation that has inflated the cost of raw material imports.

Kuroda has repeatedly said he sees no need for the BOJ to fix the YCC, including taking immediate action on side effects such as the distortion it was creating in the bond market.


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