The Bank of Japan (BOJ) ended the most aggressive monetary stimulus programme in modern history, scrapping the world’s last negative interest rate and a raft of unconventional tools while leaving the course of additional hikes unclear.
The central bank set a new policy rate range of between 0 per cent and 0.1 per cent, shifting from a -0.1 per cent short-term interest rate after saying its inflation target had come into sight, according to a statement at the conclusion of its two-day meeting on Tuesday. The BOJ also scrapped its complex yield curve control programme while pledging to continue buying long-term government bonds as needed. It also ended its purchases of exchange-traded funds.
The bank’s indication that financial conditions will remain accommodative clearly showed its first hike in 17 years isn’t the beginning of an aggressive tightening cycle of the sort seen recently in the US and Europe. Still, its data-dependent guidance on future policy left market players in the dark about when subsequent rate increases will take place, prompting a slide in the yen through the 150 mark versus the dollar.
The continued insistence on keeping conditions easy appeared to disappoint some investors looking for a more aggressive rate outlook, with the benchmark 10-year bond yield falling along with the currency. The vote for the rate hike was 7-2, another factor that may have given investors the view that further rate increases will take time. Still, economists warned against reaching the conclusion that more hikes were off the table.
“The forward guidance has become too simple to figure out the pace of rate hikes,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. “At the same time, the BOJ is keeping the door open for another rate hike later this year.”
The yen fell against the dollar from 149.29 just before the announcement to as weak as 150.40 afterwards. The broad Topix stock index rose about 1 per cent. The movement in the yen may reassure some export company executives and equity investors concerned that a strengthening of the currency would squeeze profits going forward.
“In the stock market, foreign investors are expected to positively evaluate this policy change by the BOJ as a sign of structural change in the Japanese economy,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan Ltd.
In ending the negative rate, which was imposed in 2016, BOJ governor Kazuo Ueda turned the page on the bank’s experimental monetary easing program after years in which Japan’s central bank was a global outlier. The BOJ’s move to raise borrowing costs comes just as its peers around the world are mulling cutting their rates after historically aggressive tightening campaigns.
The BOJ couldn’t say anything about the policy path towards additional hikes because it will depend on incoming data, said economist Yuichi Kodama at Meiji Yasuda Research Institute.
“But I think we should be ready for possibilities that the rate hike pace will happen faster than expected because wages are rising this much, which is likely to support consumer spending,” he said.
The BOJ’s move comes as other bigcentral banks are set to hold policy rates this month. The Federal Reserve is expected to hold interest rates at a two-decade high for a fifth month as officials meet later this week. The Bank of England is set to leave its key rate at a 16-year high of 5.25 per cent at its March 21 meeting and the European Central Bank earlier this month left interest rates unchanged for a fourth meeting. The Reserve Bank of Australia announced earlier Tuesday that its cash rate target will remain at 4.35 per cent.
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High rates and a strong currency in the US have kept Japan’s 10-year yields and the yen under pressure. The yield slipped as low as 0.725 per cent after the decision, contrary to some expectations that it would rise with a rate hike and the removal of yield curve control.
The dynamic between Japanese and US rates is set to continue despite the BOJ’s hike given continuing strength in the US economy and resilient consumer spending there.
“This is a little bit like the party has started – but when are you coming next? Markets will push the BOJ,” said Alicia García-Herrero, Natixis’s chief Asia Pacific economist.
The BOJ said its stable inflation target of 2 per cent has come into sight as a virtuous cycle of wages feeding demand-led inflation is solidifying. Rengo, Japan’s biggest umbrella group for labour unions, reported on Friday that wage talks resulted in an initial deal for 5.28 per cent increases, the best outcome since 1991. That fuelled market speculation that the conditions were finally in place for a rate move after Mr Ueda had repeatedly emphasised the importance of wage trends.
Some 38 per cent of 50 economists surveyed by Bloomberg had expected the March rate lift-off, while another 54 per cent predicted the move would come a month later. The survey was conducted before the strong results from annual wage negotiations that fuelled widespread speculation the central bank wouldn’t wait.
As part of its policy shift, the central bank said it would ditch its buying of real estate investment trusts, too. The BOJ adopted the highly unusual measure of buying risk assets such as ETFs in 2010, ultimately becoming the biggest single holder of Japanese stocks, before buying operations slowed to only three instances last year. The optics of using the measure became increasingly awkward as Japanese stocks hit a record high this month, begging the question of why the equity market needed support.
– Bloomberg
