FRANKFURT – The Bank for International Settlements said in its quarterly review on Sunday that “the shift in Japan’s monetary policy dominated financial markets” over the past two months.
European bond markets benefited from monetary easing abroad, including the Bank of Japan’s new quantitative and qualitative monetary easing policy announced April 4, the report said.
The prospect of “depressed yields” under the BOJ’s new policy framework, which features its purchases of massive Japanese government bonds, “fueled market expectations that Japanese funds in search for yield would eventually flow into close foreign substitutes for JGBs,” the Bank for International Settlements said.
The jump in domestic stocks following the BOJ’s announcement reflected mostly buying interest of overseas players, and local investors were net sellers with profit-taking and loss-cutting, the report said, citing data from the Tokyo Stock Exchange.
The report also said the sharp increase in the volatility of JGBs after the BOJ’s announcement reflected “considerable uncertainty about the future market impact of the policy shift.”
“Investor caution over potential inflation risk and volatility had reduced trading activity in JGB markets,” the report said.