- The Bank of Japan (BOJ) poses a significant uncertainty in global markets, potentially surpassing other central banks.
- BOJ’s unconventional policies, like yield curve control and negative interest rates, have impacted global bond yields.
- ING suggests that BOJ might send a subtle hawkish signal due to rising inflation and global factors.
The U.S. Federal Reserve has serious competition. The Bank of Japan (BOJ) could soon have a big impact on worldwide market movements. This is what Griffin Ardern, a trader who specializes in dealing with market volatility at the cryptocurrency asset management company Blofin, is saying.
I think the BOJ will be the most significant uncertainty factor in the future. Whether it is the Fed or the ECB, their policy paths have been clear, but the BOJ is not, which means that the BOJ is likely to ‘surprise’ us beyond expectations.
Griffin Ardern
Starting in 2016, the BOJ has been steering short-term interest rates to approximately -0.1% and aiming to keep the 10-year government bond yield at roughly 0%. This strategy, known as yield curve control (YCC), involves establishing a range of 0.5% above and below the 10-year yield target. However, in July, the bank announced its willingness to let the yield exceed the upper limit, but only if it remains below 1.0%.
These policies aimed at increasing liquidity have been pushing down global bond yields for an extended period, injecting trillions of dollars into the global financial system. The ongoing purchases of perpetual bonds have contributed to the increase in global liquidity and have been a significant factor in pushing down bond yields in advanced economies, as observed by RBC Wealth Management. This continuous inclination towards easing has made carry trades more popular. Carry trades involve borrowing money in yen and using it to invest in riskier, higher-yielding assets.
If the Bank of Japan (BOJ) decides to reverse its negative interest rate policy and yield curve control, it could potentially strengthen the Japanese yen (JPY), and this might affect various risk assets, including cryptocurrencies. While the Federal Reserve (Fed), European Central Bank (ECB), and other central banks are believed to have reached the peak of their tightening cycles, the BOJ has not yet made significant moves regarding interest rates.
Griffin Ardern pointed out that when the BOJ starts unwinding its ultra-easy policy, many assets acquired through the JPY-USD arbitrage channel (known as the carry trade) could be sold to repay debt denominated in JPY. This could have unexpected repercussions on the cryptocurrency market.
Earlier this year, Charles Schwab shared a similar perspective, warning that the carry trade could unravel rapidly, leading to significant volatility across different markets.
A recent Reuters poll conducted between September 8 and 19 found that most economists anticipate the Bank of Japan (BOJ) to discontinue its negative interest rate policy and eliminate the curve control program in the coming year.
According to ING, there is a possibility that the central bank may hint at a future shift towards a more hawkish stance on Friday. ING suggested that while the BOJ is likely to maintain its current stance for now, it could subtly convey a more hawkish message to the market due to higher-than-expected inflation, a weaker JPY, and increasing global oil prices that have pushed inflation higher. This information was reported by ForexLive.
