The ultra-low rates and loose monetary policy of the Bank of Japan has had a tremendous impact on global markets. Money will seek higher returns around the world, so Japanese cash moved offshore to cash in on the gains.
Of course, the real story is more complex. Japanese investors will sell foreign assets when the yen depreciates, global yields rise, and the cost of hedge increase. The cost of hedging is high given the inverted US curve. Yields have risen over the last year, and the yen has seen a round of depreciation in 2023. Last year Japan was a net seller of foreign assets. Now, we have deal with BOJ adjustments that may add more selling pressure. Higher rates in Japan will inhibit foreign buying of assets.
The change in monetary policy last week changes the landscape albeit in the short run we will see more ambiguity. The central bank kept its formal target for the 10-year yield at close to 0, while saying that the .5% ceiling will become a reference point and not a rigid cap. The BOJ will offer to buy 10-year debt at 1% which sounds like the new cap that effectively doubles the range for 10-year bonds.
Nevertheless, the BOJ intervened in the bond market today to stop bonds from moving higher. The range has been increased, but the central bank does not want the market to trade at the high end of the range. The central bank communication is ambiguous. Policy is changing, but the goal is not clear.
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