1 of 3 | Haruhiko Kuroda (L), governor of the Bank of Japan, shocked global markets by adjusting policies on the government's 10-year bond yield. Photo by Kevin Dietsch/UPI |
License Photo
Dec. 20 (UPI) -- The Bank of Japan on Tuesday sent a jolt through the global market by adjusting its bond yield control policies to allow for a longer-term increase in interest rates.
"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," a bank statement read.
Bank of Japan Gov. Haruhiko Kuroda said the yield on the 10-year Japanese government bond could now move 50 basis points, or 0.5%, to either side of its 0% target rate, an adjustment from its previous stance on 25 basis points.
The bank introduced its yield-control mechanism in 2016 in order to bring inflation up to a target rate of 2%, following a protracted period of stagnation. Japan's inflation through the 12-month period ending in October hit a 40-year high at 3.6%, sharply lower than the double-digit levels seen in most major European economies.
Policymakers governing the Western economies have increased their lending rates to dampen the high levels of inflation, though the Bank of Japan has been an outlier. On Tuesday, it kept its rate at a negative 0.1%, compared to 2% for the European Central Bank.
The move on the yield sent a jolt through the market as Japan's policy decisions were helping to keep borrowing costs lower, serving as a buffer to the more aggressive rate decisions from its peers.
"Maybe this is a baby step to test out the strategy and see what the market reaction is, and how much it's reacting," Bart Wakabayashi, a branch manager at State Street in Tokyo, was quoted in the Japan Times as saying. "I think we're seeing the first toe in the water" toward a normalization away from negativity.
The Japanese Parliament in early December approved a $214 billion "extra budget" for the current fiscal year in an effort to corral inflation and improve its economy. Supporters said it will allow the government to take inflation-relief action in a broader package to address ballooning utility bills caused by Russia's invasion of Ukraine.
Kuroda steps down in April and the yield decision could be a set up for his predecessor to comfortably increase lending rates next year.
Most major market indices were lower on the news. The Nikkei closed down 2.5%, while most Western markets were treading water. The German DAX was down about a quarter percent as of 9:45 a.m. EST.
