The Bank of Japan (BoJ) made a surprise announcement this week that left financial markets around the globe in turmoil: its ten year Government Bond’s yield policy is about to change. It widens the yield benchmark from 0.25 percent to 0.50 percent. Basically that means that the bank is buying government bonds for a higher maximum yield, while on the other hand leaving the interest rate untouched. The decision is an unexpected one in the quiet weeks before the holidays. Its implications are felt almost instantly. It sent shockwaves through currency markets, and stock exchanges alike. The Japanese Yen rose up in value, as the Nikkei took a downfall. In this article we'll explore what this means for you as an investor as well as how you can protect yourself from potential risks in light of this news.

A financial kick on the brakes. What is going on?

A central bank's primary objective is to maintain price stability, but it also has a mandate to support economic growth and employment. The BoJ keeps the interest rate nearly zero, as it had been since 2016 in an effort to keep market interest rates low. The central bank recently bought 10-year Japanese government bonds at a yield of 0.25 percent to ensure that the yield does not exceed that level. Last Tuesday, the Japanese central bank decided to raise this percentage to 0.50 percent. The Bank of Japan's decision to change its government bond yield policy came as a surprise to many. As Naohiko Baba, chief Japan economist at Goldman Sachs replies, “any widening of the tolerable band to be made under the new BoJ leadership was expected from spring next year, similar to the market.” Baba does even not exclude any negative interest rates as a market response.

With the inflation beating records, the BoJ's decision could lead to a lower inflation rate in Japan which is the main reason behind this. It is a literal financial brake kick to cool off the economy. That’s good news for Japanese consumers, as it would increase their purchasing power. But is it also good news for you?

Government Bonds and their influence

To explore that, we first explore the government bond policy of the BoJ. These bonds are debt securities issued by the Japanese government to support government spending and public sector projects. The Japanese government is the world’s largest issuer of government bonds, and the recent surprise decision by the Bank of Japan to increase its already large holdings of government bonds has caused global financial markets to turbulence.

In recent years, the Japanese government has been trying to stimulate its economy through so-called ‘Abenomics’, a set of policies named after Prime Minister Shinzo Abe that includes aggressive monetary easing. This policy has led to the Bank of Japan becoming the largest holder of government debt in the world, as it has been buying up vast quantities of government bonds in an attempt to drive down interest rates and spur economic activity.

The decision by the Bank of Japan to increase its holdings of government bonds even further can cause global bond markets to sell off sharply as it has done in the past. The result has been an increased volatility in financial markets around the world so far, as investors try to gauge the implications of this sudden event.

The curve of the Nikkei and Yen

The value of the Japanese yen rose directly, as investors seek out assets that will offer them a better return. This can have a knock-on effect on other currencies in the near future. For forex-trading this can be a good time to sell from Yen to for example Euro, and to hold back the other way around. An clear example: the Dollar to Yen fell more than 3 percent to 132.70 and the Euro to Yen also fell more than 3 percent to 140.62.

The most immediate impact of the BoJ's decision has been felt in the stock market. The Nikkei 225 index, which is a measure of Japanese stocks, fell sharply after the announcement. Investors are hesitant and estimate that companies will pay more interest on the debts they have. After all, a weaker Yen will make sure that exporters boost their profits, which is now a general negative.

What to expect?

The BoJ’s decision can hold a number of consequences for global markets. It is hard to predict them clearly, as the news is still quite fresh. Firstly, it could cause the Japanese yen to strengthen further more against other currencies. This could make Japanese exports more expensive, and may even lead to inflation in Japan. Additionally, the change in policy could lead to higher interest rates in Japan, which could attract more capital flows into the country. This could have positive or negative effects on other economies, depending on how their own monetary policies compare with Japan's.

With DHF Capital S.A. you can be sure of rocksteady information about the latest developments in the market. We will keep a close watch and keep you informed. Having any questions in the meantime? Feel free to contact us, as we are glad to help anytime.

Surprise decision Bank of Japan causes financial turbulence, these are the insights

The Bank of Japan (BoJ) made a surprise announcement this week that left financial markets around the globe in turmoil: its ten year Government Bond’s yield policy is about to change. It widens the yield benchmark from 0.25 percent to 0.50 percent. Basically that means that the bank is buying government bonds for a higher maximum yield, while on the other hand leaving the interest rate untouched. The decision is an unexpected one in the quiet weeks before the holidays. Its implications are felt almost instantly. It sent shockwaves through currency markets, and stock exchanges alike. The Japanese Yen rose up in value, as the Nikkei took a downfall. In this article we'll explore what this means for you as an investor as well as how you can protect yourself from potential risks in light of this news.

A financial kick on the brakes. What is going on?

A central bank's primary objective is to maintain price stability, but it also has a mandate to support economic growth and employment. The BoJ keeps the interest rate nearly zero, as it had been since 2016 in an effort to keep market interest rates low. The central bank recently bought 10-year Japanese government bonds at a yield of 0.25 percent to ensure that the yield does not exceed that level. Last Tuesday, the Japanese central bank decided to raise this percentage to 0.50 percent. The Bank of Japan's decision to change its government bond yield policy came as a surprise to many. As Naohiko Baba, chief Japan economist at Goldman Sachs replies, “any widening of the tolerable band to be made under the new BoJ leadership was expected from spring next year, similar to the market.” Baba does even not exclude any negative interest rates as a market response.

With the inflation beating records, the BoJ's decision could lead to a lower inflation rate in Japan which is the main reason behind this. It is a literal financial brake kick to cool off the economy. That’s good news for Japanese consumers, as it would increase their purchasing power. But is it also good news for you?

Government Bonds and their influence

To explore that, we first explore the government bond policy of the BoJ. These bonds are debt securities issued by the Japanese government to support government spending and public sector projects. The Japanese government is the world’s largest issuer of government bonds, and the recent surprise decision by the Bank of Japan to increase its already large holdings of government bonds has caused global financial markets to turbulence.

In recent years, the Japanese government has been trying to stimulate its economy through so-called ‘Abenomics’, a set of policies named after Prime Minister Shinzo Abe that includes aggressive monetary easing. This policy has led to the Bank of Japan becoming the largest holder of government debt in the world, as it has been buying up vast quantities of government bonds in an attempt to drive down interest rates and spur economic activity.

The decision by the Bank of Japan to increase its holdings of government bonds even further can cause global bond markets to sell off sharply as it has done in the past. The result has been an increased volatility in financial markets around the world so far, as investors try to gauge the implications of this sudden event.

The curve of the Nikkei and Yen

The value of the Japanese yen rose directly, as investors seek out assets that will offer them a better return. This can have a knock-on effect on other currencies in the near future. For forex-trading this can be a good time to sell from Yen to for example Euro, and to hold back the other way around. An clear example: the Dollar to Yen fell more than 3 percent to 132.70 and the Euro to Yen also fell more than 3 percent to 140.62.

The most immediate impact of the BoJ's decision has been felt in the stock market. The Nikkei 225 index, which is a measure of Japanese stocks, fell sharply after the announcement. Investors are hesitant and estimate that companies will pay more interest on the debts they have. After all, a weaker Yen will make sure that exporters boost their profits, which is now a general negative.

What to expect?

The BoJ’s decision can hold a number of consequences for global markets. It is hard to predict them clearly, as the news is still quite fresh. Firstly, it could cause the Japanese yen to strengthen further more against other currencies. This could make Japanese exports more expensive, and may even lead to inflation in Japan. Additionally, the change in policy could lead to higher interest rates in Japan, which could attract more capital flows into the country. This could have positive or negative effects on other economies, depending on how their own monetary policies compare with Japan's.

With DHF Capital S.A. you can be sure of rocksteady information about the latest developments in the market. We will keep a close watch and keep you informed. Having any questions in the meantime? Feel free to contact us, as we are glad to help anytime.