FRANKFURT (Reuters) – The normalization of monetary policy by the Bank of Japan (BoJ) is likely to test global bond markets, the European Central Bank (ECB) said on Wednesday, in a rare warning about from another issuing body.

The BoJ intends to maintain an ultra-accommodative interest rate policy, its governor Kazuo Ueda has said on several occasions, but observers, faced with inflation above the target, are speculating on the imminent end of its massive economic stimulus plan. , criticized for distorting the functioning of the market and triggering a fall in the yen.

Central banks around the world have raised rates at a breakneck pace over the past 18 months, but Tokyo is an exception in maintaining a very accommodative policy.

“An exit from the low rate environment in Japan could test the resilience of global bond markets,” the ECB said in the new edition of its Financial Stability Review, arguing that higher rates in Japan could influence the decisions of Japanese investors, who are very present on the world financial markets, including in the euro zone.

“Inflation in Japan has increased over the past year, leading market participants to expect the Bank of Japan to begin normalizing its monetary policy,” the Frankfurt institution said.

“A rapid reduction in credit spreads and increased volatility in exchange rates could reduce the attractiveness of their ‘carry trades’ (speculative operations on yield spreads)”, continues the ECB.

The normalization of BoJ policy could also lead to higher premiums on Japanese sovereign bonds, which could also increase the repatriation of Japanese investments, the ECB points out.

A sudden departure of these investors from the euro zone bond market could then have a significant effect on prices, she added.

(Balazs Koranyi, with Leika Kihara, Laetitia Volga, edited by Blandine Hénault)

Copyright © 2023 Thomson Reuters