Surprise Move: Bank of Japan Makes a Small Adjustment to Yield Curve Control

The financial markets saw increased volatility due to several influential events, including the Federal Reserve’s decision and strong US economic data. The ECB, as anticipated, hiked its policy rates by 25 basis points to 3.75% while expressing concerns over high inflation. The bank emphasized that it would maintain restrictive interest rates as long as necessary, but future rate hikes would depend on incoming economic data.

In the US, the release of robust economic data led to a shift in market sentiment. Q2 GDP growth reached an annualized rate of 2.4% quarter-on-quarter, jobless claims were better than expected, and durable goods orders showed strength. These positive indicators sparked an upward trend in US yields, further propelled by a moderate 7-year Treasury auction.

A report from the Nikkei suggested that the Bank of Japan (BoJ) might adjust its Yield Curve Control program, contributing to the surge in US yields. As a result, US yields increased significantly, with the 10-year yield briefly surpassing 4.0%.

The BoJ made an unexpected minor tweak to its Yield Curve Control program, allowing the 10-year yield to move more flexibly within a range of 0% +/- 50 basis points. This adjustment comes amid a global surge in core bond yields and rising domestic inflation. By raising the rate to 1% for its fixed-rate bond buying operations, the BoJ signaled its willingness to accept 10-year rates moving to that level.

Despite this, the Bank of Japan remained cautious, with inflation for this fiscal year revised up to 2.5%, but next year’s projection slightly downgraded to 1.9%. Economic growth for this year was slightly revised lower to 1.3%, while projections for the subsequent years were maintained at 1.2% and 1%.

News of the possible YCC tweak led to an initial surge in the yen. Japanese 10-year yields soared by almost 10 basis points. Market focus remains on the economic calendar in the US and Europe, which could generate further market-moving events. Amid ongoing market uncertainty, investors are urged to remain vigilant and prepared for potential further swings in sentiment as global economic conditions evolve.