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The Bank of Japan shocked markets this morning by adjusting its central bank’s yield curve control program and sparking a sharp rise in the yen. According to the policy statement, Bank of Japan will now allow Japan’s 10-year bond yields to rise to around 0.5%, up from the previous upper limit of 0.25% on their range of movement as part of fine-tuning measures to address the cost of prolonged monetary easing. It also decided to sharply increase the amount of government bond buying. It kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield by a unanimous vote.

The surprise decision has the potential to jolt global financial markets, as the Bank of Japan’s steadfast commitment to defending its 10-year yield cap has served as an anchor, indirectly helping to keep borrowing costs low around the world. The yen strengthened to as much as ¥133.21 against the dollar, compared with ¥137.16 immediately before the announcement. A further firming of the yen would help reduce the cost-push inflation that is weighing on domestic-oriented businesses and households.