The yen was stronger against the U.S. dollar Thursday afternoon, while U.S. stock indexes softened and Treasury yields rose following a news report that said policy makers would discuss a possible tweak to the Bank of Japan’s so-called yield-curve control policy that would loosen the cap on long-dated government bond yields.
Nikkei, without citing sources, reported that BOJ officials would talk about the matter at Friday’s policy meeting and that the potential change would allow the yield on the 10-year Japanese government bond
TMBMKJP-10Y,
to trade above its cap of 0.5% “to some degree.”
The Bank of Japan began implementing yield curve control, or YCC, in 2016, a policy that aims to keep government bond yields low while ensuring an upward sloping yield curve. Under YCC, the BOJ buys whatever amount of JGBs is necessary to ensure the 10-year yield remains below 0.5%.
Nikkei said a possible tweak would allow gradual increases in the yield above 0.5%, but would clamp down on any sudden spikes, allowing the BOJ to rein in fluctuations driven by speculators.
Global market participants are sensitive to changes in YCC. The BOJ sent shock waves through markets in December when it lifted the cap from 0.25% to 0.5%. Investors were rattled by the prospect of the Bank of Japan giving up its role as the remaining low-rate anchor among major central banks.
BOJ Gov. Kazuo Ueda in May said the bank would start shrinking its balance sheet and end its yield-curve control policy if a 2% inflation looks achievable and sustainable after many years of undershooting.
The yield on the 10-year JGB has traded above 0.4%, but remained below the 0.5% cap. Continued interest rate rises by the Federal Reserve and other major central banks in the past year have raised worries that the 10-year JGB yield could test the limit, Nikkei reported. Those rate hikes, meanwhile, have added pressure to the yen, whose weakness is seen contributing to inflation pressures.
The yen strengthened following the report. The U.S. dollar was off 0.6% versus the currency, fetching 139.41 yen.
Meanwhile, U.S. Treasury yields added to gains, with the rate on the 10-year note
TMUBMUSD10Y,
up more than 13 basis points at 3.987%.
U.S. stock indexes erased or trimmed earlier gains following the report. The Dow Jones Industrial Average
DJIA,
fell 70 points, or 0.2%, threatening to end a 13-day winning streak, while the S&P 500
SPX,
was off 0.1% and the Nasdaq Composite
COMP,
ticked up 0.2%.
Japanese stocks have solidly outpaced strong gains for U.S. equities in 2023, with the Nikkei 225
NIK,
up 26% so far this year versus an 18.7% rise for the S&P 500.
See: Japan’s stock market is roaring 25% higher. These 4 things could keep the rally going.
This post was originally published on Market Watch
