The Bank Of Japan Just Ushered In A New Dawn Of Looser Control

The Bank Of Japan Just Ushered In A New Dawn Of Looser Control
Stéphane Renevier, CFA

4 months ago2 mins

What’s going on here?

Faced with long nights worrying about inflation, the Bank of Japan (BoJ) claimed to have seen the light, welcoming a rebirth of financial control.

What does this mean?

Japan’s economy has been stuck in the mud for decades, and the country’s central bank has battled that deflation with “yield curve control” since 2016. The tactic involves keeping both short and long-term interest rates low, which should get the country shopping and put some meat on prices’ bones. That eventually worked a little too well though, so faced with the fresh foe of above-target inflation, the BoJ loosened its grip on 10-year government bond yields – a key long-term interest rate – a few months ago. And on Tuesday, it relinquished even more control. The bank no longer has a rigid upper limit set on the 10-year yield, meaning investors can have a bigger impact on determining its rise and fall. Case in point: the 10-year government bond yield hit its highest point in nearly nine years after the announcement.

BoJ 10 year bond yield

Why should I care?

For markets: Loyalty counts for nothing.

While it’s clear that the BoJ is branching out from yield curve control, the central bank has kept the plan’s juicier details to itself – and that might be a careful ploy. Investors may want higher returns for the increased uncertainty involved in holding Japanese bonds, which should have the ripple effect of increasing interest rates. And because higher rates would also make the country’s currency more attractive to foreign investors, a fresh flush of popularity could prevent the yen from falling any further.

The bank’s new stance on yield curve control
The bank’s new stance on yield curve control | Source: Bank of Japan

The bigger picture: The world is changing.

Interest rates, global trading relationships, and geopolitical tensions could transform markets for good. And in that sort of environment, there’s no guarantee that yesterday’s top-performing investments or sectors will still be winners tomorrow. Diversification, then, is key: commodities, “tangible assets” like real estate, bonds, and even a spot of crypto could spread out the risk that stocks can carry.

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