FirstFT: Bank of Japan stuns markets with policy change

Good morning. The Bank of Japan stunned markets yesterday with a surprise change to its controversial yield curve control policy (YCC), triggering big swings in the currency, bond and equity markets.

The BoJ is the last of the world’s key central banks to stick to an ultra-loose monetary policy and government bond purchases to stimulate growth.

But like elsewhere in the world, inflation in Japan has risen sharply this year. Core inflation — which excludes volatile food prices — has exceeded the BoJ’s 2 per cent target for seven consecutive months, hitting a 40-year high of 3.6 per cent in October.

Japan’s increasingly extreme outlier status has contributed to a huge fall in the yen this year as markets have priced in the differential with the rate-tightening US Federal Reserve.

The central bank said yesterday it would allow 10-year bond yields to fluctuate by plus or minus 0.5 per cent, instead of the previous 0.25 per cent. It kept overnight interest rates at minus 0.1 per cent.

The move triggered a sell-off in global government bond markets. The yield on the 10-year Japanese government bond rose to 0.47 per cent, its highest since 2015. The US 10-year Treasury yield rose 0.11 percentage points to 3.69 per cent while the equivalent UK gilt yield increased by a similar margin to 3.6 per cent.

The yen jumped more than 4 per cent to about ¥131.2 against the US dollar while the Topix equity index fell 1.5 per cent.

Outgoing BoJ governor Haruhiko Kuroda denied that the policy change amounted to a tightening of monetary policy. He said the change was meant to address increased volatility in global financial markets and improve the functioning of Japan’s bond markets.

The BoJ’s efforts to defend its yield curve targets have contributed to a sustained reduction in market liquidity in the Japanese government bonds market, leading to what some analysts have described as “dysfunction”.

The central bank now owns more than half of outstanding government bonds, compared with 11.5 per cent when Kuroda became governor in March 2013.

Mansoor Mohi-uddin, chief economist at Bank of Singapore, said the announcement indicated the BoJ was considering a broader exit from its YCC policy, likening it to the 1989 decision to raise interest rates that led to decades of deflation.

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The day ahead

Ambulance workers strike in the UK More than 1,600 Unite union members at the West Midlands, North West and North East ambulance service trusts will walk out over pay. Also, ambulance staff across most of England and Wales will strike over pay as part of a co-ordinated walkout by the three main ambulance unions Unison, GMB and Unite.

Economic indicators Canada will publish its November consumer price index (CPI) inflation figures. Germany releases the GfK consumer confidence survey. The UK will have its November public sector finances data today, and the US its Conference Board December consumer confidence figures

Corporate results Carnival posts its Q4 results and Rite Aid its Q3 results today. Bunzl will also have a trading update — the provider of hard hats, beard guards and disposable cutlery is expected to confirm a good end to its financial year with good revenue growth, supported by numerous acquisitions announced over the past 12 months.

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Billionaire Oleg Deripaska’s Sochi hotel complex seized A Russian court has ordered the seizure of the $1bn Imeretinskiy hotel complex and marina owned by billionaire Oleg Deripaska after the Kremlin asked the oligarch to stop criticising the war, the FT has been told by people familiar with the matter.

Silicon Valley start-ups race for debt deals in funding crunch A sharp decline in venture capital dealmaking and a closed market for initial public offerings have resulted in a funding crunch for many private technology companies, leading start-ups that have traditionally relied on deep-pocketed Silicon Valley investors to turn to alternative financing deals.

3M to end ‘forever chemicals’ production as pressure builds The manufacturing conglomerate has said it will phase out Pfas — chemicals used in products such as mobile phones and non-stick pans — by the end of 2025, citing pressure from regulators and investors over the accumulation of the long-lived substances in the environment. The transition is estimated to cost the company up to $2.3bn.

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