Bank of Japan Gov. Haruhiko Kuroda shocked markets by adjusting the central bank's yield curve control program and sparking a sharp jump in the yen just months before he is due to step down.
The BOJ will now allow Japan's 10-year bond yields to rise to around 0.5%, up from the previous upper limit of 0.25% on its movement range, according to its policy statement Tuesday. The central bank said the move will enhance the sustainability of its monetary easing.
The central bank kept its target on the yield unchanged at around zero and left its short-term interest rate at -0.1%. It also said it would "significantly" increase its bond purchases to ¥9 trillion ($67.5 billion) per month compared with the currently planned ¥7.3 trillion.
The bank's unexpected hawkish shift sent shock waves through global markets as the developed world's last holdout for rock-bottom interest rates inches toward policy normalization.
Japanese government bonds and Treasuries both slumped, while the yen surged after the BOJ raised its cap on benchmark 10-year yields to around 0.5% from 0.25%, surprising every economist surveyed by Bloomberg. The fallout touched everything from U.S. stock-index futures to the Australian dollar and gold.
The turbulence is unlikely to end on Tuesday. Japan is the world's largest creditor, and tightening domestic financial conditions may result in a wave of capital returning home. That threatens to push down asset prices and boost global borrowing costs at a time the economic outlook is deteriorating.
"It's important not to underestimate the impact this could have, because tighter BOJ policy would remove one of the last global anchors that's helped to keep borrowing costs at low levels more broadly," Jim Reid, Deutsche Bank's global head of macro research, wrote in a note to clients.
Investors are expected to exit bonds in the U.S., Australia and France, and developed market equities also are likely to decline, according to UBS Group. The Swiss bank's asset management arm, as well as Schroders and BlueBay Asset Management, are among those who stand to benefit from the BOJ's decision.
The yield on French 10-year bonds rose 9 basis points to 2.81%, the most among core markets in the region. Equivalent German securities fell a fifth straight day, putting the notes on track for their longest losing streak since early September.
"This was bound to happen with inflation rising in Japan, it's just happened sooner than many thought," said Amir Anvarzadeh, an analyst at Asymmetric Advisors in Singapore, who has tracked Japanese markets for three decades. "It could spark money flowing back into Japan. It will force Japanese investors to raise the hedging on their dollar exposure, which in turn strengthens the yen and becomes a self-fulfilling prophecy of more yen strength."
Japan's benchmark 10-year yield jumped as much as 21 basis points to 0.46% before dropping back to 0.4% after the BOJ also announced unscheduled debt-purchase operations. Trading of Japanese bond futures was briefly halted by the Osaka Exchange after they hit a circuit-breaker threshold. The yen strengthened as much as 3.6% to 132 per dollar.
"In theory, it's not a tightening in monetary policy as the yield target is still zero and the BOJ says it will step up bond buying," said Shane Oliver, head of investment strategy at AMP Services in Sydney. "But, it will be seen as a move in that direction by many adding to the hawkish bias from global central banks seen last week, hence the spike in the yen and adverse impact on global share markets."
The Nikkei 225 Stock Average slumped as much as 3%, while futures of the S&P 500 index dropped 0.7%.
Mr. Kuroda said at a briefing after the decision that further widening of the yield band isn't needed and the shift in yield-curve control is likely to be positive for the economy.
The policy adjustment came after an increase in Japan's core inflation to a four-decade high bolstered the case for a reduction in central bank stimulus. Speculation of a shift had jolted markets on Monday after Kyodo news reported that Prime Minister Fumio Kishida was planning to revise a decade-old accord with the BOJ on the 2% inflation goal.
"The BOJ action is unequivocally negative for global bonds," TD Securities strategists including Mitul Kotecha wrote in a note. "If today's move was the first step toward the end of YCC, suggesting that the yen could appreciate materially from here, Japanese investors may start to sell some of their FX unhedged global bond holdings. This will be more bearish for the long end of U.S. and European bond curves."
