Bank of Japan ‘yield curve control’ welcomed by markets

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Global stock markets responding positively to the Bank of Japan’s decision to implement “yield curve control” while keeping interest rates at negative 0.1 per cent.

The Nikkei closed 1.9 per cent up, while the FTSE 100 hit 6,876 in early trading. Eurozone banking shares were up nearly 3 per cent.

The yen dropped 0.4 per cent against the US dollar.

The Bank announced that it would aim to keep 10-year bond yields at zero per cent through its government bond buying programme.

Its QE programme will remain at ¥80trn.

Head of investing at Architas Adrian Lowcock says the policy tweak is supportive of banks’ profitability, but he warns the outlook for the country is mixed.

“The outlook for the country is rather mixed. The valuations and earnings of Japanese shares remain attractive relative to global equities but investors remain sceptical of Bank of Japan policy decisions and the strong Yen remains a significant headwind for the country.”

Nicholas Wall, co-manager of the Old Mutual Global Strategic Bond Fund, says instead of the traditional central bank model of setting the short-term rate, the Bank of Japan will now seek to set the rate on the longer-term 10-year part of the curve too.

Wall adds that the bank has committed to keeping the policy in place until inflation has overshot the inflation target of 2 per cent.

The policy is designed to shift inflation expectations, keep banks profitable via a steeper yield curve and seek to address the issue of Japanese government bond scarcity.”

Wall says Bank of Japan governor Haruhiko Kuroda is trying to keep policy loose while mitigating the negative side effects of excessive asset purchases.