January 28, 2023

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The stock market falls and the currency jumps after an unexpected move by the Bank of Japan

The Japanese yen is strengthening against the dollar, while the country’s benchmark Nikkei 225 index is down more than 2 percent, in the morning hours on Tuesday, Norwegian time.

This comes after the Bank of Japan (BOJ) made an unexpected change in its expansionary monetary policy. The central bank will now allow moves in the interest rate on 10-year government bonds of up to half a percent, up and down.

The previous threshold was 0.25 percent. According to estimates from 47 economists obtained by Bloomberg, no one expected central bank governor Haruhiko Kuroda to make any changes before he steps down in April next year. The country’s key interest rate remained unchanged at -0.1%.

– The changes are not the largest, but they are a clear sign that the Bank of Japan has begun a gradual normalization of monetary policy. The market’s reaction was not misunderstood, currency strategist Magne Østnor at DNB Markets wrote in a morning report.

Magne Østnor, currency strategist at DNB Markets

Magne Østnor, currency strategist at DNB Markets (Photo: Mikaela Berg)

Increase bond purchases

In a press release, the Bank of Japan wrote that it is increasing its monthly purchases of government bonds, from 7,300 billion yen to about 9,000 billion yen.

However, increased bond purchases are nothing new when it comes to the Bank of Japan.

The central bank owns more than half of all Japanese government bonds, and thus operates with a cap on how much interest on long government bonds can go up or down. Since the price of government bonds falls when interest rates rise, this means that the Bank of Japan will enter the market and buy more when interest rates rise, in an effort to push interest rates down again.

After the interest rate limit was extended, the interest rate on 10-year Japanese government bonds rose to 0.46 percent, just below the new limit.

Inflation in Japan, like many other countries, was well above the central bank’s 2% target. However, the 3.6 percent year-on-year price increase in October is far from as dramatic as in many other countries. The Bank of Japan has kept the country’s key interest rate near zero almost continuously over the past 22 years, and Central Bank Governor Kuroda has previously stated that tightening monetary policy would be premature as long as there is no strong wage growth that can prevent the country from falling again. in a contraction spiral.

Deflation is the opposite of inflation and is a term that refers to a decrease in the general price level.

– no longer resist

Brokerage SEB, for its part, notes that the change in the target interval for long interest rates should not be seen as a measure of monetary policy, while more Japanese government bond purchases were announced at the same time.

But the move was a signal to the market that the Bank of Japan could no longer hold out in a world of rising interest rates.

Capital Economics describes the whole thing as a surprise.

– The Central Bank believes that the performance of the bond market has been worse in recent months and that this has negatively affected the financing needs of companies. One reason for this is that the central bank has had to buy large amounts of government securities to defend its yield target this year. A morning report stated that the percentage of government securities owned by the Central Bank has hit a new record.

Macroeconomist Kelly Chen of DNB Markets called this the first step towards a tighter monetary policy.

– Japan experienced inflation, and this move gives a little more room for changes as there will be a new central bank governor in the spring. We also see pricing for the BoJ’s interest rate path picking up somewhat after this letter, she said.

Kelly Chen, macro economist at DNB Markets.

Kelly Chen, macro economist at DNB Markets. (Photo: Michaela Berg)

Unwanted currency movements

Japan has long struggled with low and even negative price growth for several periods since the 1990s, which can be indicated as a result of very low interest rates and significant quantitative easing.

In 2016, the state had a negative political rate for the first time, and it has stayed there ever since. The interest rate has been less than 0.75 percent since the end of the 1990s.

The Japanese currency has fallen nearly 20% against the US dollar over the past year. Central Bank Governor Haruhiko Kuroda, who is set to step down in early 2023, said the currency moves were “unwelcome”.

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