On December 20th, the Bank of Japan announced that they would allow 10-year Japanese Government Bonds (JGBs) to move half a percentage point away from its zero percent target, widening the bands of its yield curve control (YCC). This move completely surprised markets. For years, the BoJ has practiced YCC policy to ensure that borrowing conditions remained ultra-accommodative in the hopes of spurring on aggregate demand and inflation. This reversal in policy is not only an inflection point in Japanese monetary policy, but might also have far-reaching consequences for global financial markets: Japanese savers, historically some of the largest capital exporters in the world, might no longer have to look abroad for yield, a shift that could potentially change the flow of global funds and shake up financial asset prices globally. For one, chief investment officer of Key Square Capital Management Scott Bessent expects that a higher risk-free rate in Japan will cause yield curves around the world to steepen as Japanese investors sell their foreign bonds and invest at home instead.
Source: Trading Economics
Thomas Triedman, a sophomore at Yale, is a Summer 2022 Collegiate Associate at the Manhattan Institute
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