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The Bank of Japan shocked global markets on Tuesday by widening its 10-year government bond yield target range.

Kazuhiro Nogi |: Afp |: Getty Images:

Global markets were jolted overnight after the Bank of Japan unexpectedly widened its limit Japan’s 10-year government bond yieldtriggering a sell-off in bonds and stocks around the world.

The central bank lured the markets by adjusting the yield curve control policy to allow yields to rise. 10 years Japanese government bonds (JGB) will move 50 basis points either side of its 0% target, up from 25 basis points previously, in a move aimed at softening the impact of prolonged monetary stimulus measures.

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In its policy statement, the BoJ said the move aims to “improve market functioning and encourage a flatter shaping of the entire yield curve while maintaining accommodative financial conditions.”

The central bank introduced the yield curve control mechanism in September 2016 with the aim of raising inflation towards its 2% target after a long period of economic stagnation and extremely low inflation. The introduction of the YCC came after the Bank exhausted its bond purchases as part of quantitative easing efforts and was also a response to yield curve distortions caused by negative interest rates.

Compared to most central banks, the BJ left its benchmark interest rate unchanged at -0.1% and pledged to significantly raise the rate it purchases 10-year government bonds, maintaining its ultra-loose monetary policy stance. In contrast, other central banks around the world continue to raise interest rates and aggressively tighten monetary policy in an effort to curb high inflation.

The YCC prompted the change Japanese yen and bond yields around the world are set to rise, while Asia-Pacific shares fall. of Japan Nicene 225 was down 2.5% on Tuesday afternoon. The 10-year JGB yield briefly rose to 0.43%, its highest level since 2015.

US Treasury yields have risen sharply, moreover 10 year celebration up around 7 basis points to over 3.66% and 30 year bond increasing by around 9 basis points to 3.7%. Yields move inversely to prices.

In Europe, stocks also retreated with the open, pan-European Stoxx 600 Down 1% in early trade before recovering slightly. European government bonds also sold off German 10-year bond yield adding nearly 9 basis points to 2.2840%.

“Testing the Water”

“The decision is being read as a sign of testing the waters for a possible withdrawal of the stimulus that has been pumped into the economy to try to boost demand and wake up prices,” said Suzanne Streeter, senior investment and market analyst. Hargreaves Lansdowne.

“But the Bank is still firmly committed to its bond-buying program, insisting this is just fine tuning and not the start of a policy reversal.”

That sentiment was echoed by Mizuho Bank, which said in an email on Tuesday that the market moves reflected a sudden flurry of bets on the BoJ’s hawkish policy stance, but argued that “a popular bet does not mean that is the policy reality, or the perception of the intended policy”.

“The fact is that there is nothing in the fundamental nature of the move or the accompanying communique that challenges our fundamental view that the BoJ will adjust policy to ease pressure on the JPY, but not overtly aggressively,” said Vishnu Varathan, head of economics and strategy the leader For Mizuho’s Asia and Oceania Treasury Department.

“Firstly, every effort has been made to emphasize that policy accommodation remains in place, whether it was in terms of the expected as well as possible increase in bond purchases, or by proposing a further expansion of the YCC’s target range (for now).

Increases in volatility

The Bank of Japan said in a statement that market volatility around the world has increased since the start of spring, “and this has significantly affected these markets in Japan.”

“The performance of the bond markets has deteriorated, particularly in terms of the relative relationship between interest rates on bonds with different maturities and the arbitrage relationship between the spot and futures markets,” he added.

The central bank said that if these market conditions persist, it could “have a negative impact on financial conditions, such as corporate bond issuance conditions.”

“The Bank expects that the measures decided today will facilitate the transmission of monetary easing effects arising from yield curve controls, for example through corporate financing,” it said.

“The Bank will aim to achieve the price stability target by increasing the sustainability of monetary easing in this framework through the implementation of these measures.”

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