The Bank of Japan is headquartered in Tokyo.

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Bank of Japan announced on Friday “Greater flexibility” in its monetary policy – surprising global financial markets.

The central bank loosened its yield curve controls – or YCC – in an unexpected move with wide-reaching implications. it sent yen There was a sharp fall against the dollar, while prices of Japanese stocks and government bonds declined.

elsewhere, stoxx 600 Europe opened with losses and government bond yields in the region jumped. On Thursday, ahead of the Bank of Japan’s statement, reports said the central bank was going to discuss its yield curve control policy, which also contributed to lower levels. S&P 500 And this nasdaqAccording to some strategists.

“We didn’t expect this kind of change this time,” Shigeto Nagai, head of Japan economics at Oxford Economics, told CNBC.capital connection,

why it matters

Bank of Japan takes 'a small step towards normalization' with today's monetary policy change

“While maintaining the tolerance band for the 10-year JGB yield target at +/- 0.50ppt, the BOJ will allow for greater volatility in yields beyond the band,” said economists at Capital Economics.

“They aim to enhance the stability of the current easing framework in a forward-looking manner. Highlighting the ‘extremely high uncertainties’ in the inflation outlook, the BOJ argues that capping yields too tightly would constrain the functioning of the bond market and increase risk. Market volatility will increase as it increases. Realize.”

Taking the next step?

From a market perspective, investors , Many of whom weren’t expecting the move – they were left to wonder whether it was simply a technical adjustment, or the start of a more significant tightening cycle. When inflation is high, central banks tend to tighten monetary policy, as shown by rate hikes by the US Federal Reserve and the European Central Bank over the past year.

“Fighting inflation was not the official reason for the policy change, as it would certainly lead to stronger tightening measures,” said Duncan Wrigley, chief China+ economist at Pantheon Macroeconomics, but the bank has revised its forecast to exacerbated inflationary pressures. ” Comment.

The BOJ said core consumer inflation, excluding fresh food, would reach 2.5% in the fiscal year to March, up from a previous estimate of 1.8%. It added that there are downside risks to the forecast, meaning inflation could rise more than expected.

Kazuo Ueda, Governor of the Bank of Japan (BOJ).

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Speaking at a press conference after the announcement, BOJ governor Kazuo Ueda downplayed the move to loosen its yield curve controls. When asked whether the central bank has shifted from accommodative to neutral, he said: “This is not the case. By making the YCC more flexible, we have enhanced the stability of our policy. Therefore, it is our continued achievement to There was a move to increase the chances.” price target,” according to a Reuters translation.

MUFG said Friday’s change in “flexibility” shows the central bank is not yet ready to end this policy measure.

“Governor Ueda described today’s move as one that enhances the stability of monetary easing, rather than tightening,” bank analysts said in a note. It signals that the BOJ is not yet ready to tighten monetary policy by raising interest rates. Is.”

Economists at Capital Economics highlighted the importance of inflation data for the future. “The longer inflation remains above target, the more likely the Bank of Japan will have to follow today’s change in yield curve control with real tightening of monetary policy,” he wrote.

But according to Michael Metcalf of State Street Global Markets, timing is critical here.

“If inflation is indeed back in Japan, as we believe, the BOJ will feel the need to raise rates just as expectations for interest rate cuts elsewhere are rising. This is a medium-term positive for the JPY. there should be signs [Japanese yen]Metcalf said in a note, which has been rated very low.

End of YCC?

The effectiveness of the BOJ’s yield curve control has been questioned, with some experts arguing that it distorts the natural functioning of the markets.

“Yield curve control is a dangerous policy that needs to be scrapped as soon as possible,” Kit Jukes, strategist at Societe Generale, said in a note to clients on Friday.

“And by stabilizing JGB (Japanese government bond) yields at a time when other major central banks are raising rates, this has been a major factor in driving the yen to its lowest level in real terms since the 1970s.” . . . So, the BOJ very carefully wants to liquidate the YCC, and the yen will rally as slowly as they do so.”

Wrigley of Pantheon Macroeconomics agreed that the central bank is looking to move away from the YCC, and described Friday’s move as “opportunistic.”

“Given that markets are relatively calm and agreed to keep policy unchanged at today’s meeting, the bank seized the opportunity to surprise most investors,” he wrote.

“The market is likely to test the BOJ’s resolve, as it will likely try to gradually move away from [yield curve control] policy over the next year or so, while leaving the short-term rate target unchanged, as it still believes Japan needs supportive monetary policy.”

, CNBC’s Clement Tan contributed to this report.


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