Yen jumps as BOJ doubles yield cap

Bank of Japan governor Haruhiko Kuroda shocked markets by doubling a cap on 10-year yields, sparking a jump in the yen and a slide in government bonds in a move that helps pave the way for possible policy normalization under a new governor.

The BOJ will now allow Japan's 10-year bond yields to rise to around 0.5 percent, up from the previous limit of 0.25 percent, while keeping both short- and long-term interest rates unchanged, according to a policy statement yesterday.

The central bank said the move would enhance the sustainability of its monetary easing, but many economists interpreted the move as laying the preliminary groundwork for exiting a decade of extraordinary stimulus policy.

"Whatever the BOJ calls this, it is a step toward an exit," said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. "This opens a door for a possible rate hike in 2023 under a new governorship."

The surprise decision has the potential to send shockwaves through global financial markets as the BOJ's steadfast commitment to defending its 10-year yield cap has served as an anchor indirectly helping keep borrowing costs low around the world.

The yen strengthened to as much as 132.28 against the US dollar, compared with 137.16 immediately before the announcement. The 10-year yield jumped to as high as 0.46 percent from 0.25 percent after the decision.

Bloomberg