For years, U.S. investors could largely ignore Japan and its monetary policy makers. Those days are over.
At issue is the possibility that Japanese policy makers are laying the groundwork to abandon a longstanding policy of keeping official interest rates and Japanese government bond yields below or near zero as inflation continues to rise. That, market watchers say, could prompt savings-obsessed Japanese investors to begin selling off foreign assets as domestic investments begin to look more attractive.
The BOJ last month said the yield on the 10-year Japanese government bond could rise as high as 0.5% from a previous cap of 0.25% The yen USDJPY soared after the BOJ’s Dec. 20 decision, strengthening by more than 3% versus the U.S. dollar, while yields on 10-year Japanese government bonds traded above 0.4% to hit what until then had been their highest level since 2015. U.S. Treasury yields TMUBMUSD10Y spiked as global bond yields rose. The U.S. dollar weakened broadly versus other major currencies. U.S. stocks shook off an early bout of weakness though.
The yield on the 10-year JGB briefly rose as high as 0.545% in Asia on Friday. To halt the rise, the BOJ bought 1.8 trillion yen worth of JGBs with maturities from 1 to 25 years after it bought ¥4.6 trillion of JGBs Thursday, the largest daily amount of bond buying by the BOJ ever, The Wall Street Journal reported.
The stakes are high, as “any further relaxation — or even outright abandonment — of the YCC policy and resulting step higher in JGB yields would impart a global shock as well as sending Japanese equities lower,” they wrote. The FX options market indicates traders expect a big swing in dollar/yen either up or down following Wednesday’s meeting.
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