The Bank of Japan for decades has had one of the biggest market footprints of any central bank, from powerful currency market interventions to buying huge amounts of bonds in a “quantitative easing” blueprint that most others would eventually follow.
Doing that in the midst of the greatest global bond market selloff in 40 years would turn a formidable challenge into an almost impossible one. Timing, sequencing and signaling were always going to be crucial. This is important because when the BOJ starts to unwind its JGB holdings, domestic investors will be more willing to buy and smooth the transition - all else equal, the huge yield premium offered by foreign bonds over JGBs will have shrunk, and on a hedged exchange rate basis, perhaps evaporated completely.
Japan is the world’s largest creditor with a net investment position of $3.2 trillion, according to the International Monetary Fund. Japanese investors hold $4.3 trillion in various overseas debt instruments, including $2.1 trillion in portfolio investments. This is probably a less risky environment for the BOJ to be stepping up its policy “normalization.” And investors know it - Friday’s move did not trigger a huge shock in any market.
The response to the BOJ’s initial - and highly surprising - move on Dec. 20, 2022 to effectively double the 10-year yield cap to 0.5% was less benign.