The era of cheap money seems to be coming to an end, even for those living in global outlier, Japan.

The Japanese yen has risen sharply against the U.S. dollar after its central bank unnerved global markets by making a shock decision to move away from the country’s ultra loose monetary policy.

The Bank of Japan (BoJ) Governor, Haruhiko Kuroda, has raised a key interest rate: the yield on ten-year government bonds will be allowed to rise from 0.25% to 0.5%. This is the largest adjustment to date in a six-year experiment with its “yield-curve control (YCC) policy”.

It’s an important change of tack for the BoJ, often coined the “easiest” bank in the world or “the developed world’s last dove”. Japan has become something of a monetary policy outlier over the past year by repeatedly refusing to start quantitive tightening or stop buying bonds, even as every other major central bank (bar China) moved to increase interest rates in an effort to curb rampant inflation. 

Kuroda’s announcement has sent shockwaves across the global financial markets, causing bond yields across the world to rise suddenly and renewing recession fears. Bitcoin has spiked, US equity markets are tumbling, the FTSE 100 and European stocks were off to a weak start this morning and during Tuesday afternoon trading in Tokyo, one dollar bought 133 yen, compared with more than 137 yen just before the BoJ’s decision.

Perhaps catching the global markets off guard – by offering no hint at all of this and then dropping it during one of the most illiquid times of day during one of the most illiquid weeks of the year “was Kuroda’s cunning plan after all,” says Zerohedge’s Tyler Durden. “So the effect is immediate – like ripping off a band-aid.”

Nor was the widening of the YCC band Kuroda’s only unexpected announcement. This shift came alongside a new promise of increased bond buying. 

Japan’s bond buying operations are already extensive. In fact, the BoJ’s holdings have topped half of all the Japanese government bond market. And now it is set to intensify these monetary stimulus measures once again. 

So it could be that the unexpected rate hike is an attempt to cushion the effects of even more bond buying. Yet others are puzzled – and see the two policy announcements as a troubling contradiction. Indeed, we witnessed the chaos that ensued in Britain when Truss and the Bank of England attempted to pull in different directions in terms of tightening v easing

Kuroda himself has attempted to play down the notion that Japan is undergoing any major monetary policy shift. The move is intended “to iron out market distortions” and will not, he has insisted, “lead to an exit from easy policy.”

Yet global markets appear unconvinced. Many investors seem to have taken it is a key indication that the groundwork for change is being prepared.

If they’re right – and this does indeed signal the beginning of the end of ultra-low interest rates in Japan – the transition is unlikely to be a smooth one. 

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