The Bank of Japan hasn’t officially raised rates and is continuing to buy Japanese government bonds. But its surprise decision to stop defending the 0.25% ceiling on 10-year bond yields has reverberated through the global financial markets.
Why It Matters: While bond yields around the world climbed to new highs over the course of 2022, the Japanese 10-year yield was held at 0.25% through active intervention on the part of the Bank of Japan. Funding those purchases kept the Yen under pressure for most of the year. The de facto rate hike that allows the 10-year yield to move up to 0.50% brought strength in the Yen and weakness in the US dollar. Precious metals caught a bid and bond yields around the world moved higher. The yield on the German 10-year bond is approaching the 10-year high it reached in October and US yields are climbing as well. The lasting impact on equities from this Bank of Japan pivot is clear. A weaker dollar could be a tailwind for stocks (they certainly didn’t do well when the greenback was rallying earlier this year), but higher bond yields have been a headwind all year. For now, the most direct beneficiaries of this move have been the Yen and Gold and those typically behave as Risk Off assets. Despite the noise, and perhaps some fireworks, this central bank pivot is likely to keep the Risk Off environment intact.
Our Deeper Look considers the market reaction to the Bank of Japan’s Christmas surprise through the lens of our risk indicators.
