The Bank of Japan unexpectedly "raised interest rates" on Tuesday. Technically speaking, "rate hike" is not very accurate, but the effect is similar to that of a "rate hike": Japanese stocks fell, the yen rose and Japanese interest rates rose.
The Bank of Japan's decision at the end of the year was still very shocking to the capital markets, but the degree of shock was different. The Nikkei index fell 2.4%, the yen rose 3.1%, obviously, the yen was more affected by the central bank's decision.
When it comes to raising interest rates, the customary idea should be to "curb inflation", but the Bank of Japan is not doing it for inflation.
The main reason the Bank of Japan adjusted yield curve controls to allow long-term interest rates to rise even more is...
“The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets. If these market conditions persist, this could have a negative impact on financial conditions such as issuance conditions for corporate bonds.”
in order to avoid the depreciation of the Yen to save foreign exchange? No！
So the reason is to save foreign exchange? Just like the Bank of Japan used foreign reserves to save the market twice in the previous months? The answer is also negative. Because with the Fed's "implicit" turn, the Yen has long been rushed back down, so now the Yen is not in crisis to the extent that the Bank of Japan to rescue. The following chart is the trend of the Yen this year.
Not to control inflation, nor to save the yen, the Fed also "implicit" turn, then why did the Bank of Japan now suddenly raise interest rates?
If we look at the interest rate curve in Japan (below), we see a problem - the 10-year rate is low, but the surrounding rates are high, forming a local V-shape.
But this was not the case 1 year ago, and the chart below shows the interest rate curve 1 year ago in a very nice shape.
What does this partial V-shape tell us?
It shows that the BOJ is propping up the market here at the 10-year rate so much that all purchasers of Japanese debt are willing to buy only the 10-year government bond market that the BOJ is propping up, and not to buy other debt.
“If these market conditions persist, this could have a negative impact on financial conditions such as issuance conditions for corporate bonds”
If the Bank of Japan continues to vigorously purchase Japanese 10-year bonds, then it will cause serious problems for corporate bond issuance, because everyone is willing to buy only the 10-year bonds that the Bank of Japan dragged to the market. So now the Bank of Japan wants to reduce the strength of the market, is to allow other bonds to have a market, to be able to sell, which is the core reason for this "interest rate increase".
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