The Bank of Japan Makes a Tweak
Adjusting the parameters of yield curve control for the 10-year tenor while increasing asset purchases is not tightening, not a pivot, and not a signal (or at least not an obvious one).
Many analysts and traders are in danger of misinterpreting a technical tweak from the Bank of Japan (BOJ) as a harbinger of a fundamental policy shift. Despite the unambiguous language from BOJ officials—and despite macroeconomic conditions in Japan that remain radically different from much of the rest of the rich world—some observers believe that the BOJ is pivoting to monetary tightening in advance of governor Kuroda Haruhiko’s retirement in April. While that could happen, I believe that Japan’s monetary policymakers should be taken at their word.
The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets. Yields on Japanese government bonds (JGBs) are reference rates for corporate bond yields, bank lending rates, and other funding rates. If these market conditions persist, this could have a negative impact on financial conditions such as issuance conditions for corporate bonds.
According to the BOJ’s quarterly bond market survey conducted in early November, traders thought that “market functioning” for JGBs was the worst it had been since yield curve control had been announced, with conditions having worsened sharply since the start of 2022.
Before the policy tweak, yields on 10-year JGBs were slightly lower than yields on 8-year and 9-year JGBs. After the announcement, this kink in the curve disappeared as yields jumped across the 6-15y tenor by 10-15 basis points.
The yield jump had knock-on effects for yields in other countries, including the U.S. Meanwhile, the yen—which had already been on a tear since the trough in late October2—jumped another 4% against the dollar immediately following the BOJ announcement, while the Topix stock index dropped about 2%. This market response could be consistent with the idea that the BOJ is shifting towards policy tightening.
Did the BOJ Actually Tighten?
There are, however, several good reasons to be skeptical that the BOJ has altered its monetary stance.