The Japanese central bank surprised the markets with a tightening of interest rate policy. Experts see this as a "rate hike through the back door". In Germany, too, there are price losses.
Japan's central bank has surprisingly tightened its interest rate policy, shocking the financial markets. The Bank of Japan (BoJ) announced that it would allow interest rates on long-dated government bonds to rise more sharply. The decision caught investors unprepared: they had expected that the BoJ would make no more changes to its yield curve management until the announced resignation of central bank governor Haruhiko Kuroda in April 2023.
The central bank also announced a significant increase in its bond purchases. However, the target yield of zero percent for ten-year government bonds was left unchanged. This suggests that, overall, the measures are geared towards fine-tuning ultra-loose monetary policy rather than withdrawing monetary stimulus.
"Today's move aims to improve market functions, thereby increasing the impact of our monetary easing," Kuroda said at a news conference. "So it's not a rate hike." Specifically, the BoJ decided to allow the yield on ten-year government bonds to fluctuate more around its target value of zero percent in the future - by 0.50 instead of the previous 0.25 percentage points.
It also plans to increase monthly purchases of Japanese government bonds from 7.3 trillion yen previously to 9 trillion yen ($67.5 billion). This will strengthen the sustainability of monetary policy stance, Kuroda said. It is by no means a review that leads to yield curve control being abandoned or to an exit from loose monetary policy.
The Japanese stock market went into deep dive after the decision. In Tokyo, the Nikkei index slipped 2.5 percent to 26,568 points. The Shanghai stock exchange and the index of the most important companies in Shanghai and Shenzhen each fell more than one percent. The German stock market also reacted with losses. The leading index Dax fell by 0.94 percent to 13,811.82 points in the first hour of trading. The MDax of medium-sized stocks was 1.31 percent lower at 24,696.98 points. The leading eurozone index, the EuroStoxx 50, also fell by 1.1 percent.
"Maybe this is a small step to test the strategy and see how the market reacts," said analyst Bart Wakabayashi of Tokyo-based finance house State Street. "I think we're seeing the first toe in the water here." Thomas Altmann from QC Partners calls it a "bang by the Japanese central bank". The BoJ is joining the chorus of restrictive central banks much faster than expected. The market only expected verbal hints that the bank is already trading today is a big surprise. "The increase in the permitted interest corridor is nothing more than an interest rate hike through the back door," says Altmann.
The Bank of Japan's action caught the stock markets completely unprepared. "These are small shock waves that the Japanese central bank is sending through the markets today." And when those shockwaves meet low market liquidity so close to Christmas, the price falls could well be more severe.
The financial markets are now puzzling as to what the central bank's next step will be. Because Kuroda's term in office is nearing its end, inflation is expected to be above the central bank's target of two percent into next year. "They have widened the band and probably sooner than expected," said Moh Siong Sim of the Bank of Singapore. This raises the question of whether this is a harbinger of further normalization of monetary policy.
The ultra-loose interest rate policy of the currency watchdogs and their ongoing bond purchases to defend the upper yield limit have recently come under increasing public fire. The policy has been criticized as distorting the yield curve, eroding market liquidity and amplifying the unwanted depreciation of the yen, driving up the cost of commodity exports.
