How might global yields react to changes in BoJ policy?

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Global Yields Could Increase if the Bank of Japan Abandons Yield Curve Control

Should the Bank of Japan (BoJ) abandon its Yield Curve Control (YCC) policy, a notable increase in global yields is a potential consequence. This scenario is largely attributed to the possibility of Japanese investors accelerating their investments in unhedged foreign bonds. The behaviour of Japanese investors, who are significant holders of global debt, has historically influenced international bond markets.
Japanese Investors' Role in Global Bond Markets

Japanese investors, including major institutions like pension funds and life insurers, have historically sought yield diversification by investing overseas. When domestic interest rates are extremely low, as they have been for decades under policies like YCC, these investors are incentivised to look for higher returns in foreign markets. Many of these investments are made without currency hedging, meaning they are exposed to fluctuations in the Japanese Yen (JPY). If the BoJ were to abandon YCC, it could lead to a strengthening of the JPY and a rise in Japanese Government Bond (JGB) yields, prompting a shift in investor strategy.
Impact of Unhedged Foreign Bond Portfolios

The acceleration of Japanese investors' unhedged foreign bond portfolios is a key factor in the anticipated rise of global yields. If the BoJ abandons YCC, Japanese investors might repatriate funds from their foreign holdings to invest in higher-yielding domestic assets or to reduce their exposure to potential currency losses if the yen strengthens significantly. Alternatively, if the yen strengthens, the value of their unhedged foreign bond holdings in yen terms would increase, potentially leading them to sell these assets to lock in profits or rebalance their portfolios. This increased selling pressure on foreign bonds, particularly US Treasuries and other developed market debt, would drive up their yields.
Broader Influences on Global Yields

Beyond the direct impact of Japanese investor behaviour, other factors could influence global yields in response to a BoJ policy shift. For instance, a significant change in Japanese monetary policy could alter global inflation expectations and central bank policy outlooks. If the market perceives a move away from ultra-loose policy in Japan as a sign of broader global tightening or increased economic momentum, it could lead to higher yields across various economies. Furthermore, shifts in currency exchange rates, particularly the yen's movement against major currencies like the US dollar, can also affect the attractiveness and pricing of international bonds for Japanese investors.

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How might global yields react to changes in BoJ policy?

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