Yahoo Finance's Akiko Fujita and Rachelle Akuffo discuss the implications of the Bank of Japan's sudden policy shift.

Video Transcript

AKIKO FUJITA: Rachelle, of course, we're all watching this because of what happened overnight at the Bank of Japan.

RACHELLE AKUFFO: Exactly. I mean, the Bank of Japan really shocked markets overnight in a surprise shift in its policy. The central bank widened its cap on 10-year Japanese government bond yields, or JGBs, allowing it to move 50 basis points in either direction of its 0% target. Now this is up from 25 basis points previously. And this is something that the BOJ has been holding on to for a long time. I think people were not just surprised that it happened, but also the timing.

We know that BOJ's head is going to be stepping down in the spring. A lot of people wondering why rush this now? Why not wait until the new year? And why zig and sort of become more hawkish as one of the more dovish central banks when everyone else is trying to decelerate at least a little bit. Not pivot, but at least ease off the gas a little bit on the hawkishness. So a really surprising move here.

AKIKO FUJITA: Yeah Rachelle, I always love an excuse to talk about the Bank of Japan, but you pointed out correctly how Haruhiko Kuroda, the governor, there really living up to his reputation of surprising the markets with just a few more meetings to go until his exit come this spring. And Bank of Japan not one central bank that we talk about often on the show, but there is some context to be had here. To your point, it has been among the most major central banks, the most dovish, partly because Japan has really struggled to get persistent inflation above 2%.

And they've had this yield curve policy, yield curve control policy, in place since 2016, essentially anchoring the 10-year JGB to zero. It's still anchored at zero, but as you pointed out, they're now allowing it to drift a little more. So 50 basis points as opposed to 25 basis points. And the thinking here is that if Japan, which has struggled for so long to get inflation ticking higher, is now looking at this change, what does that mean for the other central banks at a time when the markets, some have been expecting a bit of a pivot. If Japan's making this change in addressing inflation, then the question becomes, is there even a pivot in store for the Fed for the ECB, for the other major central banks?

RACHELLE AKUFFO: Exactly. I mean, we did see Kuroda try and sort of temper some of this down, saying, look, this is not a rate hike. But I want to have you look at this tweet from strategist Jim Bianco. He tweeted, if Japan, meaning given the dovish context, is now hiking to changing policy now because of inflation, remind me why the Fed would be pivoting any time in 2023? The answer is they will not. You can forget a pivot.

So obviously a very strong reaction here. People are wondering, what does this actually mean then? Can we really expect some of the enthusiasm that we see in the US markets, are they just becoming a little bit too complacent, really sort of jumping the gun? Because as we know, Fed Chair Powell still hawkish. Obviously not-- Still tempering things with a slowdown with the 50-basis-point hike, but still not taking his foot off the gas any time soon.

AKIKO FUJITA: Well, and obviously this isn't necessarily contained. We're talking about the Bank of Japan and what happened over in Tokyo. But a lot of debt is held by Japanese investors. And this is sort of the contagion effect people are potentially looking at. If there is now yield to be had in Japan, are you going to start seeing some of these investors exit these positions in the US, in France, over in the UK, and then start going back towards investing in JGBs domestically? That's a big question mark, which is why we're seeing some big yield moves not just within JGBs but Treasuries as well as other bonds as well. It's going to be interesting to watch how this all plays out. But to your point, Rachelle, some would argue this isn't all about a tightening yet. There's a bit of a mixed message going on.