Macro views
Macro views

Bank of Japan: Yield curve surprise

Quick takes on capital markets

December 22, 2022 | 2 min read

Japanese bond yields and the yen both rallied this week following the Bank of Japan’s (BoJ) surprise decision to widen its yield curve control (YCC) bands. While the BoJ remains committed to bond purchases, markets are interpreting this somewhat hawkish pivot as a potential first step toward rate hikes in 2023. Any reduction in foreign demand for U.S. Treasurys could challenge the U.S. dollar and reestablish the yen as a potentially viable safe-haven in volatile times.

Japan 10-year government bond yield and yield curve control (YCC) bands
2016–present

Line graph of Japan government bond yield and yield curve control (YCC) bands from 2016 to present.

Bank of Japan, Bloomberg, Principal Asset Management. Data as of December 22, 2022.

The Bank of Japan (BoJ) surprised global markets this week by announcing a doubling of its cap on Japanese government bond (JGB) yields, propelling the yen to its biggest one-day surge since 1998, and pushing JGB yields to their highest levels since 2015.

In a bid to stimulate inflation, the BoJ has capped JGB yields through yield curve control (YCC) since 2016. Although the BoJ attempted to frame their decision as a policy tweak, with Japan’s inflation approaching 4% investors are justifiably considering it as a first step towards rate hikes in 2023.

As one of the last-standing central banks to maintain ultra-easy monetary policy, the BoJ has essentially acted as a global bond anchor. Shifting to a more hawkish stance would pressure global bond yields higher, and, since Japanese investors are the largest foreign holders of U.S. Treasurys and rising JGB yields would likely attract capital back to Japan, demand for U.S. bonds would be significantly reduced. However, any potential selloff would likely be muted, as elevated currency hedging costs have already been weighing on Japanese purchases of U.S. Treasurys, and a likely U.S. recession would put downward pressure on U.S. bond yields.

If nothing else, the BoJ’s actions should serve as a reminder to investors that, even as the global pace of monetary tightening slows, policymakers still can deliver hawkish, disruptive surprises.

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