Bank of Japan Revises Yield Curve Control Policy

WISCONSIN (CoinChapter.com) — The United States Dollar plunged 4% against the Japanese Yen on Tuesday after Haruhiko Kuroda, Governor of the Bank of Japan, shocked markets with news that the nation will change its bond yield policy, allowing long-term interest rates to rise.

The policy change will put some ease on the costs of monetary stimulus.

The Bank of Japan (BOJ) allows the 10-year bond yield to move 50 basis points above or below its 0% target. Mr. Kuroda said, “Today’s step is to improve market functions, thereby enhancing our monetary easing.

The USD/JPY experienced its biggest one-day drop in 24 years. Credit: Trading View

The USD/JPY drop in value was the largest since October 1998. Moments before the announcement, the currency pair was trading at 137.415. After the news, the price swiftly fell to 133.084, then declined within hours to a bottom of 130.560.

Yield Curve Control Policy

In 2016 the BOJ initiated yield curve control. This allowed the central bank to buy an unlimited number of bonds to keep yields where they wanted them. Japan’s perspective enabled the nation to keep yields low enough to combat inflation. Low yields are necessary to make investments attractive.

After Tuesday’s announcement, economists interpreted the news as a definitive transition towards normalizing Japan’s monetary policy. In effect, Japan put the world on notice that they are open to higher risk-free rates.

Bank of Japan’s Credibility on the Line

Markets generally accepted the BOJ’s news as positive. The question is whether the bank will abandon the yield curve policy; Mr. Kuroda said they are not thinking about it. Trust is an issue. Markets like sudden surprises, so the BOJ needs to keep moving forward with dropping yield curve control to retain reliability and respectability.