The Bank of Japan recently heralded an interesting modification to its Yield Curve Control (YCC) program, a scheme that has fueled global markets with liquidity since 2016. It announced an increased hard cap on the 10-year Japanese government bond yield from 0.5% to 1%, an action described as hawkish by market analysts. With cryptocurrencies such as Bitcoin being considered risk assets, such monetary policy changes undoubtedly resonate within the crypto universe.
Bitcoin was resilient above $29,000, even as a cloud of uncertainty loomed following the BOJ’s announcement. Interestingly, the Japanese central bank kept the short-term interest rate at 0.1% and retained the 10-year government bond yield around 0%. Yet, they detached the 0.5% band from being a stringent limitation and proposed to offer more ‘flexibility’ in yield curve control.
To clarify, a hard cap ever since has meant a maximum yield on a 10-year JGB. The subtle change in the language around the cap from ‘limit’ to a less constraining ‘reference’ suggests a lean towards a more multipurpose YCC. Even though the bank seems to possess an uncanny capacity to couch the tweak with milder semantics, some alarmed voices see it as much more hawkish under the skin.
This point of view is shared by Chris Weston, the Head of Research at the foreign-exchange brokerage Pepperstone, clarifying that the new hard cap stands at 1%. This adjustment trailblazes a different path from the International Monetary Fund’s advice to the BOJ about gearing away from the yield curve control in preparation for potential interest rate hikes.
The snag here lies in the balance between investors’ anticipation and the market signals. Several investment banks had projected a band widening to 100 basis points from 50 bps, Goldman Sachs threw caution in the air, expressing the risk of sending incorrect signals to the market.
Inevitably, following BOJ’s decision, bond yields climbed, sending unfavorable cues to risk assets, especially Bitcoin. The 10-year Japanese government bond yield escalated to 0.56%, a zenith since last January, painting an intriguing possible scenario for cryptocurrency followers.
The BOJ’s loosening grip may suggest stormy times for risk assets, particularly as the Federal Reserve and other central banks ponder holding interest rates higher for extended periods. While the expanded hard cap can herald a surge in liquidity, it does beg the question—As the world shifts toward future interest rates hikes, could the shift in Japan’s bond-market control pull the peaceful rug from underneath crypto assets?
Source: Coindesk
