Bank of Japan shocks markets with policy tweak

The Bank of Japan shocked markets on Tuesday as it held its benchmark interest rates steady but said it was widening its yield target range.

The Bank left the policy balance rate unchanged at -1.0% and the 10-year yield control target unchanged at zero. However, it also announced a surprise tweak to the yield control curve policy meaning that it will now allow the 10-year bond yield to fluctuate in a range of 0.5% above or below the target of zero, versus 0.25% previously.

The BoJ said in a statement that the change to the yield curve control policy was expected to "enhance the sustainability of monetary easing".

The yen strengthened and bonds sold off after the announcement.

Capita Economics economist Marcel Thieliant said: "The Bank argued that the functioning of the bond market had deteriorated in recent months, which had negatively impacted corporate financing conditions. One reason is that the Bank had to buy sizeable amounts of bonds to defend its yield target this year and the share of bonds owned by the Bank has hit a fresh record high in recent weeks.

"There was nothing in the statement that would suggest that this decision heralds a wholesale tightening of monetary policy. For one thing, the Bank’s assessment of current economic conditions as well as its outlook over coming quarters was little changed from the October meeting.

"If anything, the downgrade to the Bank’s view on external demand suggests that it is getting increasingly worried about the strength of the recovery. Most importantly, the Bank reiterated that it expects ‘short-term and long-term policy rates to remain at their present or lower levels’."