Yen jumps on report that Bank of Japan will discuss tweaking yield curve control

“While speculation of a policy tweak has been wrong before — and reports suggest only that the BOJ will “discuss” a YCC tweak — rising inflation, rising wages and the sheer scale of BOJ purchases suggests that the time for some adjustment is coming,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank.

Japanese bond futures slumped on the report, falling 87 ticks, the most since March on a closing basis.

Policy makers sent waves across financial markets in December when they announced they would allow Japan’s 10-year bond yields to rise to around 0.5 percent, double the previous upper limit of 0.25 percent. The yen rose sharply as yields on government bonds jumped, with the fallout touching everything from US stocks to the Australian dollar and gold.

Japanese investors are the biggest foreign holders of US government bonds and own everything from Brazilian debt to European power stations to bundles of risky loans stateside. Some market participants worry that higher yields at home might tempt them to switch out of these overseas investments.

A leadership change at the BOJ helm earlier this year made investors even more expectant for the end to a decade of ultra-low interest rates that sent a wall of money overseas and punished domestic savers. But since then, investors have seen little progress.

Last week Bloomberg reported that BOJ officials expect to discuss the side effects of yield curve control but saw little urgent need to address the issue. The central bank looks at the costs and benefits of YCC at every meeting, people familiar with the matter said.

In the latest Bloomberg survey, 82 percent of economists forecast no policy change at the July meeting. Around 18 percent see the BOJ adjusting or scrapping yield curve control, with some of these economists seeing potential for the BOJ to take advantage of calmer markets to make an early move.

“Judging by this price action, the impact of tweaking or ending YCC will very likely spill over and push other global yields higher as well,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. Yields on US Treasuries extended higher following the Nikkei report.

Any shift could also be transformational for the yen. Japan’s ultra-loose monetary policy has weighed on the currency as central banks elsewhere have aggressively hiked rates to battle inflation, with the yen losing about six percent against the US dollar this year.

Even a small increase in the cap on yields would likely support the currency. “If they end up adjusting tolerance by 25 basis points, then USD/JPY will get closer to 135-136 area,” said Bipan Rai, CIBC’s global head of foreign-exchange strategy. “Complete abandonment of the control takes us closer to 120 over time.”

The yen edged higher in early Friday morning in Tokyo to around the 139.20 per dollar level, having gained 0.5 percent Thursday.