The Bank of Japan has recently brought to a close their intensely determined monetary stimulus programme, marking the end of the global record of negative interest rates and other novel approaches, with future hikes left undefined.
At their two-day meeting, concluding on Tuesday, the central bank established a fresh policy rate bracket of zero to 0.1%, contrasting with a preceding -0.1% short-term interest rate, after announcing that their inflation target was within reach, according to their statement. The BOJ also renounced its intricate yield curve control scheme, while pledging to carry on with purchasing long-term government bonds as required. Their acquisition of exchange-traded funds also ceased.
It was clear from the bank’s signal that financial conditions would persist being favourable, revealing that the first rise in 17 years does not mark the start of an assertive tightening cycle, as the US and Europe have recently witnessed. However, their future approach, being reliant on data, has left market observers unsure about the timing of future interest rate increases. The uncertainty resulted in the yen dipping below the 150-pound mark against the dollar.
Investors, who were anticipating a more active rate outlook, seemed dissatisfied with the persistent lenient conditions, causing the benchmark 10-year bond yield to dip with the currency. The voting results for the rate increase were 7-2, which could have convinced investors that subsequent interest rate increases may be delayed. Nonetheless, economists cautioned against concluding that there would be no additional rate increases.
The simplified forward guidance makes it hard to deduce the speed of rate increases, according to Masamichi Adachi, the principal Japan economist at UBS Securities and a former BOJ official. “Concurrently, the BOJ is leaving room for a possible rate increase later within the year.”
Following the announcement, the yen weakened against the dollar from 149.29 to a low of 150.40. However, the Topix stock index experienced a rise of approximately 1%. The yen’s movement could give assurance to certain export company leaders and equity investors who were worried that a strengthening yen would cut into future profits.
Tomo Kinoshita, a worldwide market strategist at Invesco Asset Management Japan Ltd, said, “In the share market, foreign investors are likely to view this BOJ policy alteration positively as a symbol of structural alteration in the Japanese economy.”
The Bank of Japan’s (BOJ) Governor, Kazuo Ueda, put a stop to their negative interest rate policy, implemented back in 2016, marking an end to the central bank’s experimental financial easing strategies after its prolonged unique standing on the global stage. This move to increase the costs of borrowing from the BOJ coincides with discussions among international counterparts contemplating slashes to their rates following historically severe clampdown efforts.
For future increases, the BOJ was unable to share a specific strategy as it will be reliant on forthcoming data, according to economist Yuichi Kodama from Meiji Yasuda Research Institute. He pointed out the possibility of hastened interest rate hikes due to a rise in wages, which could consequently spur consumer spending.
Meanwhile, other leading worldwide central banks are preparing to maintain their policy rates for the month. The US Federal Reserve is anticipated to cling to its two-decade high interest rate for a fifth consecutive month at the upcoming meeting. Similarly, the Bank of England is set to retain its principal rate at the towering 16-year milestone of 5.25% at the meeting planned for 21st March, while the European Central Bank chose to preserve its interest rate for a fourth time earlier this month. The Australian Reserve Bank also declared that it will hold its cash rate target at 4.35%.
Japan’s high rates and the US’s strong currency have kept Japan’s 10-year yields and the Yen under duress. Surprisingly, after the decision, the yield diminished to as low as 0.725%, contrary to speculations that it would increase following the rate hike and the abolition of yield curve control. This trend between Japanese and US rates is predicted to persist, courtesy of the robust US economy and resilient consumer expenditure.
Commenting on the situation, Natixis’s chief Asia Pacific economist, Alicia Garcia Herrero, noted the crucial role market forces will play in influencing the BOJ’s action.
With the BOJ acknowledging the steady progress towards its 2% inflation target, it’s clear that a virtuous cycle of wages feeding demand-induced inflation is taking hold. This was further backed by Rengo, Japan’s largest labour union coalition, which reported initial agreements for wage increases of 5.28%, the most favourable outcome since 1991. Consequently, this sparked market conjecture that the conditions were ripe for a rate hike, which Ueda has frequently stressed hinges on wage trends.
A Bloomberg survey revealed that 38% of the 50 economists participated anticipated the rate hike to occur in March, with a further 54% suggesting it would happen the following month. These predictions were made prior to the robust outcome of the annual wage negotiations, intensifying rumours that the central bank may not postpone its decision.
The central bank also announced a change in their strategy – discontinuing the purchase of real estate investment trusts. Back in 2010, the Bank of Japan (BOJ) implemented the unconventional act of buying risky assets such as ETFs. This resulted in the BOJ becoming Japan’s largest individual stockholder. However, buying operations dwindled to a meagre three instances the previous year. As Japanese shares attained record heights this month, it brought about a difficult dilemma – why does a thriving equity market still require support? – Bloomberg