In a volatile trading session, the yen strengthened while stocks and bonds in Tokyo experienced a decline after the Bank of Japan (BOJ) announced a more flexible approach to controlling long-term yields. Meanwhile, Chinese stocks were set for a weekly gain, driven by hopes of further stimulus measures.
During a two-day meeting, the BOJ decided to maintain ultra-low interest rates but adjusted its stance on yields. Previously, the central bank had set a 0.5% cap on 10-year government bond yields, but it now considers this cap as a reference and has raised its intervention threshold to 1%. This move was anticipated to some extent, as the Nikkei newspaper had already hinted at the BOJ’s intentions. The yen initially experienced wild fluctuations but eventually reached its highest level against the dollar in a week, trading at 139.14.
Japanese bank stocks saw a surge of 4% due to expectations that the BOJ’s policy adjustment could pave the way for higher rates in the future and boost profitability in lending. However, analysts noted that the central bank’s modified stance did not indicate a complete departure from accommodative monetary policies. Although the end of an era of extreme monetary accommodation appeared to be on the horizon, the BOJ remained cautious about the downside risks to the economy and inflation outlook.
On a global scale, this week has been pivotal for central banks, particularly in the U.S. and Europe. The end of an aggressive hiking cycle, which began more than a decade ago, seems to be approaching as both the Federal Reserve and the European Central Bank recently implemented rate hikes.
As a result of stronger-than-expected U.S. data and speculation surrounding the BOJ’s policy adjustment, ten-year U.S. Treasury yields increased and were up 3 basis points to 4.04%.
In Asia, excluding Japan, the MSCI broadest index of Asia-Pacific shares remained steady. However, it was on track for a weekly gain of 1.8% as investors anticipated stimulus measures to support China’s slowing economy.
The U.S. dollar showed broad strength, particularly against the Australian dollar, which depreciated by 0.8% to $0.6652. This decline was partly influenced by disappointing retail sales figures for June, which reduced the need for an additional interest rate hike.
Amid these developments, the European Central Bank (ECB) decided to keep its rates unchanged in line with expectations. However, ECB President Christine Lagarde’s comments about a potential pause in rate hikes in September led to a depreciation of the euro. The currency experienced a drop of nearly 1% and hovered around $1.0980 on Friday.
Going forward, market participants are closely watching the release of French and German inflation data, as it is likely to contribute to determining the ECB’s future outlook. Previous weak business activity readings have already suggested the impact of rate hikes.
Overall, this week’s actions by central banks around the world indicate that the aggressive hiking cycles witnessed over the past years are nearing an end. While the BOJ’s adjustment to its yield curve control policy represents progress towards a more flexible stance, economists expect yields to gravitate towards the new 1% threshold, albeit not in a linear fashion.
Brent crude oil futures experienced a slight decline from their three-month highs and settled at $83.63 per barrel.
In conclusion, the Bank of Japan’s decision to adopt a more flexible approach to long-term yields has caused the yen to strengthen, while Chinese stocks are on track for a weekly gain due to hopes for additional stimulus. Meanwhile, central banks globally have been implementing rate hikes, heralding the end of an era characterized by aggressive tightening measures. The European Central Bank’s decision to keep rates unchanged, coupled with President Christine Lagarde’s hint of a potential pause in rate hikes, led to a depreciation of the euro. These developments illustrate a shift towards less accommodative monetary policies.
