Policy Shift Stuns the Markets!

Japan Central Bank Shocker: Policy Shift Stuns the Markets!

It was a moment of mayhem this week as the S&P 500, NASDAQ, and Dow Jones futures plunged from bright green to deep red in a matter of minutes. The catalyst didn’t come from the U.S., though – something was happening many miles away as the Nikkei index quickly led the Asian markets lower.

As you may recall, the BoJ (Bank of Japan) was famous (or perhaps notorious) for leading the way in enacting negative interest rates in the 21st century. Sure, the U.S. has negative “real” interest rates (meaning they are negative after subtracting the inflation rate), but the BoJ cut Japan’s benchmark interest rates to negative territory even before subtracting the inflation rate.

A handful of other nations’ central banks also tested the waters with negative interest rates, but Japan was the poster child for the NIRP (negative interest-rate policy) movement. While so many other central banks in developed nations have been hiking their respective benchmark interest rates lately, Japan was seemingly the last holdout of the legacy NIRP movement.

This week, however, Japan’s outlier status suddenly and unexpectedly changed. Using “yield curve control,” the BoJ said it will allow the yield on the 10-year Japanese government bond to move 50 basis points on either side of its 0% target.

The global markets were stunned at this move, and Japan’s Nikkei 225 index closed substantially lower for the session. The U.S. futures markets followed to the downside, though not quite as dramatically.

Should the U.S. markets care so much about what the BoJ does? The answer is yes because Japan is a top-five world economy by GDP. Along with this, economies are connected in the 2020s. An economic dislocation halfway around the globe could certainly impact all developed nations sooner or later.

That’s not the main driver of today’s market anxiety, though. Japan was the leader in ultra-low monetary policy, and the BoJ is now giving in to the counter-trend toward “higher for longer” interest rates and tighter monetary policy in general.

Japan ultimately had no other choice, and that’s what’s scaring the global markets. Japan represented the “last man standing,” the final bastion of the ultra-accommodative, easy-money policy, but the inflation contagion couldn’t be resisted any longer.

In a policy statement, the BoJ said the policy shift was intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.” Global investors aren’t assuaged by this claim because they know full well that Japan’s central bank is following rather than leading now.

One has to wonder whether the global markets will have a dip that doesn’t recover so quickly as Japan finally capitulates and allows for the possibility of bond yield hikes. Investors are clearly rattled by this development, and they ought to be.

Japan had a long multi-year run of low inflation, and so did the U.S., but that era is in the rearview mirror now. Expect tight monetary policy to linger longer and central banks around the world to tighten the screws – and don’t be too surprised if the “dip that doesn’t recover” is right around the corner.