The BoJ has buckled and shifted its YCC target in response to rising inflation. The 10-year JGB yield will be allowed to move 50 basis points either side of 0%, as opposed to 25 basis points (the previous cap).
The argument that Japan was on the verge of an important shift in its monetary policy was outlined one month ago: Japan is exiting ‘deflationary’ mindset, November 22nd 2022.
The YCC shift is going to bring more attention to Japan’s inflation numbers and greater scrutiny of the BoJ’s monetary policy (as a persistent global outlier). It will also increase speculation of further changes to YCC policy, which could convulse through financial markets. Indeed, Japan’s rising public sector debt burden could destabilise asset markets – globally.
Today’s policy change comes one week after a hawkish ECB announcement (also forced to react to stronger underlying inflation numbers). Real yields are rising again in the US. The 10-year inflation-indexed yield has climbed back up to 1.42%. The real 30-year yield is now 1.47%. The Fed did not want real yields to fall too far, and the bond market is responding. This year has ended as it began, with risk premiums on the rise.
