What the Bank of Japan's Surprise Move Means for Investors

Markets really don’t like uncertainty, and even a suggestion that Japan might be forced into letting bond yields soar higher is enough to get risk managers heading for the exit. Fixed income isn’t quite the haven some commentators had convinced themselves it might be in the new year.

BOJ Governor Haruhiko Kuroda was at pains to downplay any implications for official rates, but this sudden move after implacable denials speaks louder.

The BOJ did increase its QE bond buying ammunition to 9 trillion yen ($68 billion) per month from 7.3 trillion yen — all to defend its new line in the sand, the 0.5% 10-year yield. But this is merely a symbolic delaying tactic.

Kuroda steps down in April, so Tuesday’s decision increases the expectation that his replacement will usher in further monetary tightening. This is no longer an impenetrable negative interest rate fortress. It might make foreign speculators meditate on the perils of shorting both Japanese government bonds and the yen simultaneously.

The BOJ policy minutes noted that core consumer price rises are around 3.5%, an uplift from the prior statement, as well as emphasizing that inflation expectations have risen.

That is welcome because, unlike other central bankers, Kuroda has struggled against deflation throughout his decade-long tenure. However, with huge energy price increases now feeding into core prices, the risk is that the inflation genie may escape the bottle.

Kuroda decided to take preemptive action rather than allow speculation to build when he hands over the BOJ reins in the spring. The near-death experience in October, when markets severely tested the BOJ’s mettle, clearly left an impression. It is better for the BOJ to move of its own accord than be humiliated into action.

The central bank’s position of capping bond yields, and maintaining negative 0.1% official rates, is untenable in the longer-term; but the BOJ is now starting to take the strong medicine it needs. It will have to maintain a steely resolve. Investors globally will be on watch.

(Image: Bloomberg)

Marcus Ashworth is a columnist at Bloomberg Opinion. In this role, he brings in over 30 years of experience in the investment banking industry in covering the European markets. Prior to this, Ashworth has held senior roles in equity, fixed income, and derivatives markets.