In a surprise move, Bank of Japan loosens bond yield cap

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The Bank of Japan broadened caps for government bond yields, a surprise move that pushed bond yields higher globally and dinged stocks in Asia.

The central bank on Tuesday said that it would allow the yield curve on the Japanese Government Bond to range 50 basis points either side of its 0% target, up from the previous cap of 25 basis points.

The Bank of Japan did not mention inflation in its policy statement, but said the shift is intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.“

Japan had been a holdout among major industrialized nations in allowing yields to rise. Europe nations and the U.S. have been hiking rates aggressively to battle inflation.

The central bank introduced the previous caps to control its yield curve in September 2016, hoping to lift inflation closer to its 2% target after a long stretch of economic malaise and stagnant inflation. Because of the slow economic growth, the government has primarily used spending to combat inflation instead of raising interest rates.

Earlier this month, Japan’s parliament approved a hefty 29 trillion yen ($206 billion) supplementary budget aimed at countering the blow to household finances from rising food and utility costs and the weaker yen.

In reaction to the announcement bond yields rose globally, but stocks in Asia slid immediately.

Japan’s Nikkei 225 index closed 2.5% lower.

Shares in Europe and the U.S. retreated briefly, but recovered.

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