Kuroda policy shocker start of BOJ’s risky path towards exit

Bloomberg

Bank of Japan (BOJ) Governor Haruhiko Kuroda just gave investors a glimpse of what to expect when the world’s boldest experiment with ultra-loose monetary policy comes to an end.
In the face of sustained market pressure, Kuroda shocked markets by saying he’ll now allow Japan’s 10-year bond yields to rise to around 0.5%, double the previous upper limit of 0.25%.
Whether this is a strategic tweak to buy time for his yield-curve control settings until his decade-long term ends in April or the start of the end for his unprecedented monetary easing remains to be seen.
But one thing is clear: a crack has opened that markets around the world will keep prising in the weeks and months ahead.
“This is a step towards an exit, whatever the BOJ calls it,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official.
“This opens the door to a chance of a rate hike in 2023 under a new governorship.”
The yen strengthened sharply against the dollar after the decision and continued gains, briefly touching 132.00 from 137.16 immediately before the decision. The yield on 10-year Japanese government debt jumped to 0.46% from the previously capped level of 0.25% following the BOJ’s move.
Japanese bank stocks surged in afternoon trading as investors expected improved earnings for financial institutions, but overall Tokyo stocks ended down.
The ripple effects also spread far outside Japan, with the fallout touching everything from US stock-index futures to the Australian dollar and gold.
The market moves suggested investors interpreted the move as a tightening measure.
But another way to view the latest surprise from the 78-year-old governor is as a step to make the yield curve control program more, not less, sustainable.
“This confirms our view that the BOJ is determined to stick to the YCC policy even after a change in leadership in April next year,” said Shigeto Nagai, a former BOJ official and head of Japan research at Oxford Economics.
“It appears that the BOJ decided to accept the effective tightening as a cost to make YCC policy more sustainable.”
That was the message peddled by Kuroda in his post-decision press conference, where he said the tweak is designed to boost the effectiveness of his signature program. Kuroda has two more policy meetings to oversee before his term is up, meaning it will fall on his successor to complete the path toward policy normalisation.
And the market gyrations highlight just how tricky it will be to reverse policy given the combination of unorthodox moves supporting the BOJ’s stimulus: keeping negative short-term interest rates, pinning 10-year yields near zero, making massive asset purchases and government interventions in currency markets to counter the yen’s fall.
Any misstep by the new governor could trigger market turmoil on a global scale.
“The BOJ has created so much tension in markets this year with its policy stance — the spring has been so tightly wound — the impact could be massive when they finally decide to let it go,” Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore, said ahead of the meeting.