Bank of Japan decision will ripple around the world

TOKYO, Dec 22 ( - The year isn't yet done with rattling investors' cages. The Bank of Japan’s surprise widening of its yield curve-control policy on 10-year government bonds will have an impact far beyond its shores.

The decision may be ostensibly designed to improve the functioning of its domestic government and corporate bond markets — which have sunk into an illiquid quagmire — but the unspecified reasons may be more compelling.

Most importantly, the move adds weight to the recent downturn in the strength of the US dollar. The BOJ had been struggling to square a circle: To boost inflation by maintaining super-easy monetary policy without having the yen suffer disproportionately. According to Kit Juckes, currency strategist at Societe General SA, the yen is at its lowest real effective rate since 1973. In October — when the yen briefly topped 150 to the dollar — Japan had some tactical success turning the tide when it deployed foreign exchange reserves. Now there is some definitive policy strategy to back it up. That matters because the BOJ can’t just sell off reserves forever. The yen gained nearly 4% to the dollar.

If the dollar weakens further, it will make life easier for the rest of the world, too. The euro's breach of parity with the greenback this autumn, and sterling's worryingly close dalliance, now look to be more confidently in the rearview mirror. Developing markets will also be relieved. ...continue reading

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