• Bank of Japan makes surprise tweak to its YCC policy, insists it’s not tightening
• Dollar slumps 3% against yen, Nikkei plunges as markets see move as exit from stimulus
• Gold supported as broader market mood remains downbeat

The Bank of Japan ended weeks of speculation about a policy pivot and took its first step on Tuesday to move away from years of ultra-loose monetary policy. In its first adjustment to its yield curve control policy since March 2021, the BoJ decided to widen the range of its target band on the 10-year yield from plus or minus 25 basis points to plus or minus 50 bps.

There was no change to the short-term policy rate of -0.1% and the Bank maintained its easing bias in its statement. In fact, the BoJ is planning on buying more Japanese Government Bonds (JGB) in the next quarter, boosting its monthly purchases from 7.3 trillion yen to 9 trillion yen.

Far from signalling that this is the beginning of the end of unconventional means to lift inflation, the BoJ is going out of its way to portray today’s decision as a necessary step to make its current policy mix more sustainable. The yen has been obliterated against the US dollar in 2022 as sovereign bond yields around the world have surged on the back of central bank tightening, of which the Bank of Japan has been an outlier and has ended up owning more than half of all outstanding JGBs by trying to defend its upper yield target.

However, with Kuroda’s term set to expire in April next year, investors are drawing the conclusion that the Governor is paving the way for his successor to introduce more substantial policy tweaks in the next 12 months.

The yen shot higher across the board in the FX market after the announcement as investors were taken by surprise by the timing. Only a few analysts thought a policy adjustment was imminent and most traders expected the pivot to come after Kuroda’s departure.

The dollar has crashed below 133 yen, hitting an intra-session four-month low of 132.08 yen. The euro and pound also fell by more than 3% versus the yen, while the aussie’s and kiwi’s losses were closer to 3.5%.

The antipodean currencies underperformed against their US counterpart too. The Australian dollar had a wobble after the minutes of the RBA’s last meeting revealed policymakers thought about pausing in December, while the New Zealand dollar came under pressure from a plunge in business confidence in the ANZ’s December survey.

The euro and pound on the other hand edged higher as the dollar’s post-Fed rebound faltered even as Treasury yields rose for a second day. The US 10-year yield brushed a three-week high earlier in the day but growing recession fears seem to be weighing more heavily on the greenback following last week’s dismal flash PMIs.

Equity markets are also struggling after the S&P 500 ended in the red for the fourth straight session on Monday. Disney and Meta were some of the big stocks pulling the market lower as the former’s new Avatar sequel disappointed at the box office and the latter is facing huge antitrust fines from the European Union. Even Tesla finished lower as its shares gave up earlier gains that came after Twitter users voted for Elon Musk to step down as CEO of the social media platform.

US futures are somewhat more mixed today but with not a great deal on the agenda, it’s hard to see sentiment shifting drastically before Friday’s PCE inflation numbers.

In Asia, losses in Tokyo dragged the region lower. The Nikkei 225 index closed down by 2.5% as long-term borrowing costs in Japan jumped to the highest since 2015, with the 10-year JGB yield reaching 0.47% at one point after the BoJ raised the cap to 0.50%.

Meanwhile, Chinese stocks extended their losses amid ongoing worries about business disruptions from surging Covid cases and how authorities might respond to the latest outbreaks.

This uncertainty combined with deepening concerns about a recession in the US and globally are bolstering the safe-haven gold. The precious metal is back above $1,800/oz today and approaching last week’s 5½-month highs.

Whilst the weaker dollar is certainly helping, gold’s rebound comes alongside the uptick in bond yields, suggesting that investors are getting gloomier about the outlook on fears that the Fed and other central banks are overtightening.