In last months Anticipation had grown that in 2023 the Bank of Japan (boj) would finally tighten monetary policy after years of uncompromising stimulus. Almost nobody expected this to happen in 2022. But on December 20, the bank raised its ceiling on 10-year government bond yields to 0.5% from 0.25%. The Christmas surprise sent the yen higher – and sparked speculation about what might come next.
Since 2016 the boj has intervened in bond markets to keep 10-year bond yields around 0%, a policy known as “yield curve control”. Technically, the bank allowed fluctuations of a quarter of a percentage point around the 0% target. But the 0.25% cap was particularly relevant this year as upward pressure on yields developed globally. Now the boj allows movements of half a percentage point around zero. Following the announcement, the 10-year bond yield rose to 0.4% from 0.25%, the biggest daily move since 2003.
That boj was a global outlier and maintained its ultra-loose policy even as the US Federal Reserve and other central banks decided to hike interest rates sharply. Japan’s benchmark interest rate of -0.1% has not changed for almost seven years and the bank owns more than half of the government bond market. To make this possible, a yield curve control was implemented boj to control long-term interest rates without running out of bonds to buy. Paradoxically, when central banks make credible promises to lock in the price of an asset, they often don’t have to do much to enforce the policy. The market implements the binding by itself.
For most of the history of politics, this more or less worked. In 2022, however, the peg has come under significant pressure as traders have speculated that monetary policy would need to be tightened. The rift between Japan’s politics and the rest of the rich world caused the yen to fall 23% against the dollar from early 2022 to mid-October. In October, annual inflation was 3.6%, a 40-year high and well above BOJ‘s 2% target. Since the Covid-19 pandemic, although most of the inflation has been imported, many central banks have been surprised by the assumption that price growth will cool without tightening monetary policy.
Nonetheless, it was generally assumed that each fulcrum through the boj would come after its current governor, Kuroda Haruhiko, left in April. The fact that politicians acted faster makes sense: they take it easy boj Months of bond-buying to enforce the old cap and the larger losses it would incur on its larger bond portfolio.
How far will Japan’s central bank go now? Following the announcement, the dollar fell 3.4% against the yen, but the Japanese currency remains at its weakest in two decades. Economists are watching shunto, Japan’s wage negotiations in the spring between large companies and unions, for more signs of inflation. Japanese firms increased winter premiums by 9.7% Nikkeia business newspaper, the largest such increase since 1975.
Mr. Kuroda claims he has not tightened monetary policy, only reacting to volatile market conditions. But the announcement was hisSayonara available,” says Jesper Koll of Monex Group, a Japanese brokerage firm. “It opens the door for ‘Operation Freedom’ for whoever its successor will be.” The Japanese financial markets could face a turbulent 2023. ■
Sign up for more expert analysis of the biggest stories in business, finance and markets talks about moneyour weekly newsletter for subscribers only.
