We may have overcome the Fed decision on Wednesday, but it seems too early to celebrate at the moment. While the Fed took expected steps, the possibility of an unexpected move by the Bank of Japan has caused some turbulence. The markets could become more volatile around 06:00 tomorrow morning.
The US markets experienced some fluctuations about 6 hours after the interest rate decision. The BTC price also dropped to around $29,140. The circulating statements at the moment seem noteworthy. According to these, the Bank of Japan will discuss allowing long-term interest rates to exceed the 0.5% limit by changing its yield curve control policy at its policy board meeting at 06:00. Under yield curve control, the central bank purchases large amounts of Japanese government bonds when it seems likely that 10-year yields will exceed the permitted range of 0.5% above or below zero, causing disruptions in the market. The proposed change will maintain the interest rate ceiling but allow moderate increases beyond this level.
Since the ceiling was raised from 0.25% in December, 10-year yields have remained below the current ceiling, rising to around 0.44%. However, concerns about domestic inflation and ongoing interest rate hikes by other major central banks such as the Federal Reserve and the European Central Bank are fueling fears that yields could surpass the 0.5% threshold. According to familiar sources with the discussions, the BOJ conducted a survey in early July among major banks on how much they expected long-term interest rates to rise if the yield curve control was adjusted or removed. Banks believe that if the policy is abandoned, 10-year rates could rise above 0.5%, indicating a risk of increased market rates if the central bank completely relinquishes control.
Under the proposed more flexible policy, the BOJ would allow gradual increases above the 0.5% threshold but still prevent sudden increases. This would allow for the containment of fluctuations driven by speculators.
Since September 2016, the BOJ has been implementing a yield curve control (YCC) program, committing to buying government bonds as much as necessary to keep 10-year bond yields close to 0%. As stated by RBC Wealth Management, continuous bond purchases have increased global liquidity and exerted significant downward pressure on bond yields worldwide.
If interest rates or bond yields in your country are not at the desired levels, you would explore opportunities abroad. However, when you believe that they are approaching the desired levels, it seems more logical to sell your assets abroad and invest your money domestically. At the moment, Japanese investors, or rather investors who cannot find what they are looking for in their country, may sell US stocks and bonds and repatriate their funds. This means that positions in BIST, TL, dollars, gold, and crypto can also be reduced. Naturally, Japanese investors seem inclined to sell their foreign assets depending on the decision.
These sales have the potential to increase volatility in the next 24 hours. If you wake up in the morning and feel surprised, it is likely that the rumors about the Bank of Japan have been proven right.