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Now The BOJ Jolts Financial Markets Even When It Stands Pat

(Bloomberg) — The expectations in financial markets around the Bank of Japan’s monetary policy are so great that an unchanged decision has spurred a sharp knee-jerk reaction.

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Ten-year US yields declined as much as eight basis points to 3.46% while the Bloomberg Dollar Spot Index gained 0.5% after the BOJ maintained its ultra-loose stance. The yen slumped 2.1% and Japanese government bond futures surged.

The decision caught some traders by surprise but is unlikely to douse speculation that the BOJ will normalize policy as inflation in Japan accelerates and Governor Haruhiko Kuroda nears the end of his term. More volatility could rock global markets as analysts say it’s a question of when — not if — the central bank exits its yield-curve control policy.

“We see it as a pause on the road to further policy normalization,” Mayank Mishra, a strategist at Standard Chartered Plc, said referring to the policy decision. “We remain bullish on JPY, expecting yield differentials to continue to turn more supportive of the currency on further BOJ policy normalization and slowing global growth/inflation.”

Japan’s central bank kept its main policy settings unchanged Wednesday, leaving its negative interest rate at -0.1%, while maintaining a trading band of 50 basis points for 10-year bonds around 0%. There had been some expectation that it would raise the cap or drop the yield curve control.

The BOJ’s decision may provide an additional tailwind to Treasuries, which have been buoyed by expectations that the Federal Reserve will slow its pace of tightening. Benchmark US yields due in a decade have fallen over 80 basis points since reaching a high in October.

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Japanese investors are the largest foreign holders of Treasuries, but have been cutting their overseas debt exposure as the cost to hedge a volatile yen has skyrocketed. They sold a record ¥21.7 trillion ($169 billion) of foreign bonds last year, according to preliminary data from the Ministry of Finance going back to 2005.

Should the BOJ turn hawkish, these funds may then pivot more heavily into Japanese bonds, and away from foreign debt.

Global Anchor

The BOJ’s stance also spurred gains in Australian government bonds, with benchmark 10-year yields falling as much as five basis points to 3.55%.

“The big fear was the mass dislocation that could have unfolded if Japanese investors exited the US, euro zone and Australian bond markets en-masse thanks to tastier local yields,” said Richard Franulovich, head of currency strategy at Westpac Banking Corp. “This news today keeps the BOJ positioned as an anchor for global yields.”

But further out, economists are positioning for a change, with a number bringing forward their expected timing for a shift, according to this month’s Bloomberg survey. Some now predict an adjustment in April, the first meeting scheduled under a new governorship, while others expect a pivot in June.

–With assistance from Ruth Carson, Marcus Wong and David Finnerty.

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