Bank of Japan Governor Haruhiko Kuroda shocked markets by doubling the 10-year bond yield ceiling. This caused yen to surge and government bonds to fall, helping pave the way for a possible policy normalization under the new governor.
The policy statement said the bank now allows 10-year bond yields to rise up to 0.5% in an effort to increase the sustainability of monetary easing. But many interpreted this move as a starter to an exit from a decade of extraordinary stimulus policies. Nevertheless, the central bank kept its 10-year yield target unchanged at around 0% and left the short-term interest rate at -0.1%. It also said it would significantly increase bond purchases to £9 trillion ($67.5 billion) a month, which is higher than the currently planned £7.3 trillion.
Yen strengthened to 132.68 just before the announcement, while the 10-year bond yield jumped to 0.46% after the decision.
Accordingly, shares of Japanese banks rose in the afternoon as investors anticipated higher earnings at financial institutions. Stocks of Mitsubishi Financial Group also rose 9.6%, as did the stocks of the Mizuho Financial Group. But overall, shares were down 1.5%.
The ripple effect spread far beyond Japan, with US stock indices falling sharply and Treasury bond yields rising.
Although many people called for the bank to do more to improve the functioning of the bond market, no one expected such a change in December. The unexpected decision came as a shock to global financial markets, especially since the Bank of Japan's unwavering commitment to protect its 10-year yield cap has indirectly helped keep borrowing costs worldwide low.
Before the Bank of Japan meeting, talks were about the likely policy direction after Kuroda resigns.