Bank of Japan: End of an Era?

Policy changes at the Bank of Japan could potentially reverse capital flows, shift global yields higher, contribute to a stronger yen, and increase the value of Japanese stocks.

With all the attention on the U.S. Federal Reserve, it can be easy for U.S. investors to forget about the impact of other monetary authorities. For over a decade, the Bank of Japan's (BOJ) policy has enabled Japan to be an important source of investment funding, with negative interest rates allowing investors to borrow cheaply in yen and then purchase investments in other countries offering a higher return. That may be about to end and trigger a reversal in capital flows and a surge in cross-market volatility. Policy changes at the BOJ signaled last week have the potential for major impacts on global financial flows and markets in the coming year.

End of an era?

The BOJ is the only major central bank that has not yet hiked interest rates during the current cycle—but last week the central bank took steps in preparation for a policy change. Like other central banks, the BOJ had pursued QE, or quantitative easing, eventually buying more than 50% of all Japanese government bonds. But it didn't stop there. The BOJ also purchased corporate bonds, commercial paper, equity index exchange traded funds (ETFs) and Japanese real estate investment trusts (J-REITs). No other central bank had been nearly as aggressive or devoted to pursuing QE and negative interest rates. Then, last week, the BOJ officially ended its commitment to buy an unlimited amount of Japanese government bonds in an effort to cap the 10-year yield at 1%, a policy referred to as Yield Curve Control (YCC), signaling a likely shift toward ending QE and hiking interest rates in 2024.

Japan yield curve control range and yen and the 10 year yield