The Bank of Japan (BoJ) is considered to be a central bank that is on the leading edge in many respects as it's been the most innovative and aggressive in terms of using monetary policy to boost its economy. The major reason is that Japan has been battling with crippling deflation since the 2000 bubble popped, due to unfavorable demographics and a lack of dynamism.

Maybe the best reflection of BoJ policies and the country's economic situation is the low yield for Japanese Government bonds (JGB). In essence, the 10-year JGB yield was negative between 2016 and 2020. It did increase from a low of -0.40% to 0.25% from the March 2020 low to last week. And, the 10-year yield rose further from 0.25% to 0.49% following the BoJ announcement.

While Japan is certainly on the leading edge in terms of battling deflation, this is not the case with inflation. Unlike other global central banks that have been aggressively hiking to curb inflation, the BoJ has taken a slower tack. Its rates remained unchanged at -0.1% even if this yield control measure is a small step towards tightening policy. The BoJ also said that it will continue buying JGBs to ensure sufficient market liquidity.

Currently, inflation in Japan is running at 3.7% which is well above its longer-term average but much lower than Europe or the U.S. GDP growth has been around 1.5% in 2022. Clearly, the central bank doesn't see inflation as continuing to run at these levels, or it wouldn't maintain such an accommodative stance.

Markets were surprised when the BoJ announced a surprise move to widen the target range for the 10Y JGB which led to a short selloff in stocks and bonds across the world, although these losses were quickly recovered. Previously, the BoJ had a band for the 10Y between -0.2% and 0.25%. This band has been widened to 0.5%.

In its statement, the central bank said that the move would "improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions."

While stocks and bonds were quick to recover, the Yen was a big gainer as it was up 3% vs the U.S. dollar.

Japanese inflation is projected to come in at 3.7% annually in November, according to a Reuters poll last week - a 40-year high, but still well below the levels seen in comparable Western economies.

Costa said the Bank of Japan's move was not geared toward combating inflation but addressing the "infrastructure and the dynamics of JGB trading" and the gap in volatility between the trade in JGBs and the rest of the market.