A major policy change by Japanese Central bank
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The Bank of Japan held its benchmark interest rates steady and announced it will modify its yield curve control band, the central bank said in a statement.
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The BOJ will expand the range of 10-year Japan government bond yield fluctuations from its current plus and minus 0.25 percentage points to plus and minus 0.5 percentage points, it said.
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This caused massive appreciation of nearly 3% in yen against dollar and a fall of nearly 2% in japanese and select asian stocks.
The reason?
- BOJ ,which has tried its best to hold to ultra low interest rates is now slowly planning to take it bit higher. Once japanese yields go higher, money can be pulled from bond markets like US and bring it back to japan thereby taking the bond yields higher in US markets and cause fall in equity.
This is a tricky and interesting subject where frankly speaking, I try to learn more and more on a regular basis and I wouldn’t be sure to say - this is the reason why the move is happening.
What is yield Curve Control?
- A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
- Yield curve control (YCC) involves targeting a longer-term interest rate by a central bank, then buying or selling as many bonds as necessary to hit that rate target.
What the BOJ does is its own form of quantitative easing which helps in controlling the 10-year and steepen the yield curve — that is, increase the difference between the yields of short-term bonds — which are negative in Japan — and long-term bonds.
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