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Bank of Japan's surprise policy shift spooks global markets

economy | Dec 20, 2022 10:07 AM IST

Bank of Japan's surprise policy shift spooks global markets

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In its final meeting of the year, the BOJ said its yield curve control (YCC) targets, set at -0.1 percent for short-term interest rates and around zero for the 10-year bond yield would remain.

The yen surged and Asian shares fell sharply on Tuesday after the Bank of Japan's (BOJ) decision to allow long term interest rates to rise more, a move analysts said could signal a step towards changing Japan's long-held yield curve control. MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.9 percent.

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Japan's Nikkei Stock Index shed 2.2 percent after trading in positive territory earlier in the day, as stocks resumed trading following the BOJ decision.
In its final meeting of the year, the BOJ said its yield curve control (YCC) targets, set at -0.1 percent for short-term interest rates and around zero for the 10-year bond yield would remain.
But significantly it decided to allow the 10-year bond yield to move up and down 50 basis point each from the zero percent target, against the previous 25 point each.
"If we start with the expectation of the market from Bank of Japan, the expectation was that they would keep the policy fairly accommodative, fairly easy, at least till quarter two, quarter three next year. So this effective tightening of policy came as a surprise to the markets. And that's why we are seeing such sharp market reaction," Abhilash Narayan, Senior Investment Strategist Group Wealth, Standard Chartered Bank told CNBC-TV18.
Weak global cues following BoJ policy announcement, Indian headline indices BSE Sensex and NSE Nifty50 slipped one percent each.
"I think the other reason why we've seen equity markets slide down is because Bank of Japan was the last bank which was still holding on to accommodative policy. So with the shift that we've seen in Bank of Japan’s stance just now, what it means is that even the most dovish central bank is looking to effectively tighten policy by allowing bond yields to move higher, and that at the margin has hurt the sentiment for the equity markets," Narayan said.
The dollar dropped 2.4 percent against the yen to 133.62 after the BOJ decision, hitting a four-month low. Australian shares extended earlier losses to be off by 1.27 percent in afternoon trade. Hong Kong's Hang Seng Index was down 1.4 percent while China's CSI300 Index was off 1.15 percent.
In early European futures trading, the pan-region Euro Stoxx 50 futures were down 0.89 percent at 3,784, German DAX futures were down 0.91 percent at 13,888, FTSE futures were down 0.63 percent at 7,321.
US stock futures, the S&P 500 e-minis, were down 0.52 percent at 3,825.5.
In Asian trading, the yield on benchmark 10-year Treasury notes rose to 3.6752 percent compared with its US close of 3.583 percent on Monday.
Narayan said: "We've got the press conference from Bank of Japan governor, Haruhiko Kuroda, later today. So we will get a bit more color around that in terms of what is the extent of the shift in thinking from Bank of Japan. But clearly, equity markets could remain under pressure for the next few sessions."
Narayan added that Japanese investors, who are big international investors, will likely withdraw some of the money from international markets and put them back into domestic markets, because the opportunities may start to look a bit more attractive for them domestically. "So the implications of the move will play out over the next few days or even next couple of weeks. But yes, at the margin, it does add to the whole story that globally, central banks are tightening policy."
The two-year yield, which rises with traders' expectations of higher Fed fund rates, was at 4.2662 percent compared to the US close of 4.262 percent.
Australia's Reserve Bank considered leaving interest rates on hold at its Dec 6 policy meeting, according to minutes published on Tuesday, but delivered a 25 basis point hike.
The Dow Jones Industrial Average fell 162.92 points, or 0.49 percent, to 32,757.54, the S&P 500 lost 34.7 points, or 0.9 percent, to 3,817.66 and the Nasdaq Composite dropped 159.38 points, or 1.49 percent, to 10,546.03. The three markets closed in the red for the fourth straight session.
The S&P 500, the Dow and the Nasdaq are on track to notch their largest annual percentage losses since 2008, the nadir of the global financial crisis. US crude ticked up 0.7 percent to $75.71 a barrel. Brent crude rose to $80.44 per barrel. Spot gold was slightly higher at $1,792.29 per ounce.
(With inputs from Reuters)
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