Japan's Central Bank Is Roiling Markets

The Bank of Japan’s most significant policy changes to its massive monetary stimulus in two years quickly injected life into the government bond market. BOJ Governor Haruhiko Kuroda said the central bank would permit the benchmark 10-year yield to trade a bit more widely, and pledged to keep rates at extremely low levels for an "extended period." Economists disagreed on whether the BOJ had enhanced its stimulus or taken a tiny step toward unwinding it. As central banks in the U.S. and Europe move away from crisis-era policies, investors are asking how long the BOJ can continue with its own stimulus program, and how high yields could go in the meantime.

Yields began to rise in July in response to news reports that BOJ policy makers were debating taking steps to address some of the side effects of the five-year old stimulus program, such as undermining bank profitability and distorting bond markets. On July 31, the BOJ confirmed that the benchmark 10-year yield would be allowed to move up and down a bit more freely. Kuroda said the previous trading range -- assumed by the market to be 0.1 percentage point on either side of 0 percent -- would be permitted to roughly double. As the market digested the conflicting signals, the yield tumbled by the most in nearly two years. It rebounded two days later to an 18-month high of 0.145, before the central bank unexpectedly purchased bonds in a so-called special buying operation, pushing the yield back to 0.115 percent.