Japanese Yen Strengthened and 10-Year JGB Yield Rose as Bank of Japan Allows “Greater Flexibility” in Target Range
Tokyo, Japan – The Japanese yen strengthened and the 10-year Japanese Government Bond (JGB) yield rose after the Bank of Japan (BOJ) announced that it would allow “greater flexibility” in its target range for 10-year JGB yields. This move comes as the BOJ adjusts its stance on its yield curve control policy, stating that it will continue to permit 10-year government bond yields to fluctuate within a range of around plus and minus 0.5%.
Markets reacted cautiously to the news, with investors testing the waters after Nikkei reported that the BOJ would allow long-term interest rates to rise beyond its current cap of 0.5% “by a certain degree” at its board meeting today. This adjustment in policy led to the strengthening of the Japanese yen and an increase in 10-year JGB yields, reaching 0.575% for the first time since September 2014. The yen was trading at 138.64 against the US dollar at 12:35 p.m. Hong Kong and Singapore time.
The BOJ’s decision to allow greater flexibility within its target range is seen as an attempt to address concerns about Japan’s relatively low interest rates. With inflation having exceeded the BOJ’s 2% target, there are growing worries that the yen has become less attractive and vulnerable to selling. While central banks around the world have been raising rates to combat inflation, Japan has maintained an ultra-loose monetary policy and kept rates low.
Under its yield curve control policy, the BOJ currently targets short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero. To further expand its tolerance, the central bank has also offered to buy 10-year JGBs at 1% every business day through fixed-rate operations, unless no bids are submitted. This move effectively increases its tolerance by an additional 50 basis points.
In other news, Japan’s core consumer price index rose by 3.3% year-on-year in June, slightly higher than the 3.2% recorded in May. This further strengthens concerns over the country’s low interest rates and the attractiveness of the yen.
As the BOJ continues to navigate the challenges of balancing its policies to address inflation, the strengthening yen and rising JGB yields reflect the cautious sentiments of the market. Investors will closely monitor any further developments from the BOJ to gauge the potential impact on the Japanese economy and global financial markets.
Disclaimer: This article includes contributions from CNBC’s Lim Hui Jie.