With the Bank of Japan (BoJ) considered by some as the last bastion of ultra-loose monetary policy in the current economic cycle, the Bank’s policy shift on 20 December caught some investors by surprise. By accepting a wider band either side of its target for the ten-year JGB yield, the BoJ effectively encouraged higher borrowing costs. Indeed, the yield on the ten-year bond rose around 20 basis points in the session following the policy announcement.
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The yen also appreciated sharply following the announcement. The currency had been drifting higher in the weeks prior to the policy shift, but climbed around 4% against the USD in the trading session following the announcement, the largest such increase in more than 10 years.
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The news also unsettled some other government bond investors, already digesting more-hawkish-than-expected comments by the US Fed Chair Jerome Powell in the previous week. Indeed, the US 10-year Treasury yield rose by a cumulative 20 basis points through Monday and Tuesday.
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Ultimately, the prospects for bonds and monetary policy will depend on how inflation and economic growth evolve in the coming months. While inflation has risen to multiyear highs in Japan, this will have been driven in part by earlier yen weakness, and it remains far below the rates recorded in other countries such as the US and UK.
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Moreover, headline inflation, and core inflation to a lesser extent, have declined in the US in recent months, and the outlook for economic growth is less than rosy, suggesting that a broader pivot to looser monetary policy may be on the cards.
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Admittedly, gloomy economic forecasts in some major economies have yet to materialise in the official data, but one of the main reasons for this is that households, particularly in the US, have been dipping into pandemic-related savings, and this cannot continue indefinitely.
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The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.
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