An unchanged decision from the Bank of Japan gave global investors a modest jolt Wednesday, leaving the bigger shock of a future policy shift hanging over markets from the yen to Treasuries.
Standing pat caught some traders by surprise but is unlikely to douse speculation that the BOJ will normalize policy as inflation in Japan accelerates and Governor Haruhiko Kuroda nears the end of his term. It suggests just a temporary setback to bets on a stronger yen and a bond selloff as analysts say it’s still a question of when — not if — the central bank exits its yield-curve control policy.
Japan’s currency slumped over 2%, its government bonds surged as traders covered short positions and stocks pushed higher. Treasury 10-year yields declined alongside their Australian equivalents, while the Bloomberg Dollar Spot Index strengthened after the BOJ maintained its ultra-loose stance.
“We see it as a pause on the road to further policy normalization,” Mayank Mishra, a strategist at Standard Chartered Plc, said referring to the policy decision. “We remain bullish on the yen, expecting yield differentials to continue to turn more supportive of the currency on further BOJ policy normalization and slowing global growth/inflation.”
Bonds in other global markets were seen as most at risk from any policy shift that pushes Japanese yields higher, which may trigger a wave of money flowing back to the nation out of substantial overseas holdings. Japanese investors are the largest foreign owners of Treasuries and strategists have said bonds in Australia and France are also vulnerable.
Last year’s rise in local yields helped fuel a record sale of ¥21.7 trillion ($166 billion) of foreign bonds in 2022, according to preliminary data from the Ministry of Finance going back to 2005.
“The big fear was the mass dislocation that could have unfolded if Japanese investors exited US, euro zone and Australian bond markets en-masse thanks to tastier local yields,” said Richard Franulovich, head of currency strategy at Westpac Banking Corp. “This news today keeps the BOJ positioned as a anchor for global yields.”