The Bank of Japan Considers Loosening Bond Yield Cap

The Bank of Japan (BOJ) may relax its cap on long-term bond yields, a move that could have significant implications for global financial markets, according to Nikkei.

The BOJ is reportedly weighing an adjustment to its yield-curve control (YCC) policy, which could allow 10-year Japanese government bond yields to exceed 1%. This would mark a change from the current cap of 1%, which was implemented in late July to replace the previous cap of 0.5%. Under the YCC policy, the BOJ is committed to unlimited fixed-rate buying operations to keep yields below the cap.

When the July decision to implement the 1% cap was announced, it led to a surge in long-term government bond yields, including the rate on 10-year U.S. Treasurys. Consequently, there was a brief surge in the value of the Japanese yen and U.S. stock indexes experienced a downturn as a result.

Analysts argue that a shift away from YCC and the possibility of the BOJ being one of the last major central banks to move away from ultralow policy rates weakens one of the remaining influences on global bond yields. Additionally, a potential increase in yields on Japanese government bonds could lead Japanese investors to reduce their holdings of U.S. Treasurys. It’s worth noting that yields and debt prices typically move in opposite directions.

Overall, loosening the cap on Japanese government bond yields has the potential to significantly impact global financial markets and investors around the world will be closely watching any developments from the BOJ.

The U.S. Dollar and Japanese Currency

Prospects of Japanese Yen Weakness

Governor Kazuo Ueda of the Bank of Japan has previously mentioned that foreign exchange considerations play a role in policy decisions. Considering the possibility of further weakness in the Japanese yen, analysts at Rabobank speculate that there may be adjustments to Yield Curve Control (YCC) this month.

U.S. Treasury Yields on the Rise

The yield on the 10-year U.S. Treasury note has increased by 8.3 basis points, reaching 4.909% following this report. Since late July, U.S. Treasury yields have been on an upward trajectory due to various factors. The significant rise in yields caused the 10-year rate to momentarily surpass 5%, a level not seen since 2007. This surge in yields has also been linked to a stock market pullback, with the S&P 500 entering a state of correction after falling over 10% from its peak in July 2023.