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Asia equities drop, yen plunges as BOJ tweaks yield control

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The yen dropped 0.7% against the dollar to hit a session low of 150.12 after the central bank maintained its target for the 10-year government bond yield near 0% set under its yield curve control

Asian equities tumbled on Tuesday, hovering around a near one-year low, as manufacturing activity data from China disappointed while the yen weakened beyond 150 per dollar after the Bank of Japan tweaked its bond yield control policy.

The yen dropped 0.7% against the dollar to hit a session low of 150.12 after the central bank maintained its target for the 10-year government bond yield near 0% set under its yield curve control but redefined 1.0% as a loose “upper bound” instead of a rigid cap.

Under criticism that its heavy defence of the cap is resulting in market distortions and an unwelcome yen decline, Bank of Japan had lifted its de-facto ceiling for the yield to 1.0% from 0.5% in July.

Saxo market strategist Charu Chanana said the new reference range suggests the BOJ will allow yields to increase above 1%, while still trying to keep the changes to policy very subdued.

Speculation of an eventual removal of yield curve control will continue to build, last week proved that dollar/yen at 150 is not a line in the sand, and this could bring a test of 152, she said.

The 10-year JGB had yet to trade after the announcement. The yield climbed 6.5 bps earlier in the day to 0.955%, its highest since May 2013.

According to a report from the Nikkei newspaper on Monday, Bank of Japan is considering adjusting its yield curve control policy helped push the yen to a two-week high of 148.81 per dollar but the fragile currency gave up all its gains after the BOJ decision.

The bank, which maintained its ultra-loose monetary policy, also removed a pledge to defend the 1% level with offers to buy unlimited amount of bonds.

The Bank of Japan will buy some bonds around that (1%) level but not unlimited and they have shown their hand, said Tom Nash, portfolio manager at UBS Asset Management in Sydney.

He said: Through all the linguistic contortions, the fact is that they are dismantling yield curve control. A yield cap is not a yield cap if you change it every time the market gets close.

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