Japanese yen drops, benchmark bond yields fall back on target as BOJ holds firm

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HONG KONG – The Japanese yen fell 1.7% and the yield on benchmark 10-year government bonds fell on Friday after the Bank of Japan (BOJ) underlined its commitment to ultra-accommodative monetary policy, the leaving the world’s last major dovish central bank.

The move should offer modicum of relief to global markets already rocked this week by a sharp interest rate hike by the US Federal Reserve and a surprise move by the Swiss National Bank’s previous dove on Thursday, which had sparked speculation that which the BOJ might change its position.

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But the BOJ stuck to its massive stimulus package and said it would offer to buy unlimited amounts of 10-year Japanese government bonds (JGBs) at 0.25% each business day, reiterating guidance on market transactions it had made in April.

Japan’s low inflation by global standards allows the BOJ to maintain an ultra-accommodative monetary policy. This week, the central bank intervened in the markets to defend the implied cap on the benchmark bond yield of 0.25%.

That yield hit 0.268% on Friday ahead of the BOJ meeting as investors speculated that the BOJ might change its yield curve control policy, but it was back at 0.25%.

The dollar climbed as high as 134.64 yen after the announcement, not far from its 24-year low of 135.6 hit earlier this week. It was last up 1.25% at 133.8 yen.

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The dollar has climbed 15% year-to-date against the yen this year as the spread between Japanese and foreign interest rates continues to widen.

Dollar/yen volatility hit its highest level in two years ahead of the meeting.

The average for Japan’s Nikkei stock was down 2.17% before the announcement of the decision, which took place during the lunch break.

« Japan’s case is different than elsewhere, and until they see some kind of wage growth or service prices increase, they won’t easily change their monetary policy, » Min Joo said. Kang, senior economist for South Korea and Japan at ING.

« The currency market will be the first to react and pull back to a level above 135, although we see strong resistance above that. »

She said she thinks the market will try to break the 0.25% yield cap for the 10-year bond, « but we don’t think (BOJ Governor Haruhiko) Kuroda will even change control. of the yield curve anytime soon ».

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A significant change in policy was not expected by investors, but the meeting was closely watched as the consequences if the Bank of Japan abandoned its yield curve control policy would be felt around the markets.

“When that peg eventually breaks, markets will be hit hard. Japan is currently an ultra-cheap source of funding in a world of rising rates and with a currency that only goes one way – down. If the two reverse at the same time,…ouch!” Rabobank analysts said in a note ahead of the BOJ’s decision.

The Swiss National Bank on Thursday raised its benchmark rate for the first time in 15 years in a surprise move, and the Bank of England raised rates for the fifth consecutive time.

The day before, the US Federal Reserve raised rates by 75 basis points, its largest increase in a single meeting since 1994.

Hurt by fears of higher rates, global stocks are down 5.7% for the week so far, on track for the biggest weekly percentage decline since the pandemic-driven selloff in March 2020 (Report by Alun John; editing by Kim COghill)