Japan ends yield curve control

For the last couple of decades, Japan has practised yield-curve control, where the Bank of Japan intervened in the bond markets to ensure the 10-year Japanese bond yield was no higher than 0.15%. This was done to help Japanese government finances.

This had the consequence of Japanese insurance and pension funds investing in foreign bonds in search of an income.

Here is a graphic of the extent of Japanese foreign holdings at the end of Dec 2022:

source

Since January, the Bank of Japan has allowed the 10-year yield to rise from 0.15% to 1%.

Counterintuitively, Japanese investors have responded by selling foreign holdings and repatriating money to Japan, despite US 10-year yields being over 5%. Why?

Well, the Japanese insurance companies and pension funds had to hedge their foreign holdings because of currency risk. Hedging always reduces returns, so what looks like a 5% yield in US bonds becomes 0.9% after hedging.

Still much better than the 0.15% they got from JGBs, which is why they did it. But now that they can get 1% on JGBs, why bother with the hassle of overseas bonds?

The end of Japanese yield curve control is the reason the yields on western bonds have risen so fast in the last two months - Japanese investors are selling up and bringing their money home.