The Bank of Japan ended the most aggressive monetary stimulus program 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% and 0.1%, shifting from a -0.1% short-term interest rate after saying its 2% inflation target had come into sight, according to a statement at the conclusion of its two-day meeting Tuesday. The BOJ also scrapped its complex yield curve control program 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 a pedal-to-the-metal 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.
“There is still some distance to 2%, if we look at it from the perspective of the expected inflation rate,” BOJ Governor Kazuo Ueda said at a news conference after the decision. “Considering the gap, I think we will conduct normal policy as I mentioned earlier, keeping the importance of maintaining an accommodative environment in mind.”
At the same time, he said later, bigger upward price risks could result in a rate hike.
Bank of Japan Governor Kazuo Ueda / Photo: Bloomberg
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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 central bank’s forward guidance doesn’t offer a clear way to figure out the pace of rate hikes, according to Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. Still, he said, “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 150.32 afterwards. The broad Topix stock index rose about 1%, while the Nikkei 225 index regained the 40,000 level. 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.
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Turning the Page
“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, Ueda turned the page on the BOJ’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 toward 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.
BOJ's Key Price Gauge Is Forecast to Stay Above 2% Target |
The BOJ’s move comes as other major central 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% 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%.
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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% 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 ongoing 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 Garcia Herrero, Natixis SA’s chief Asia Pacific economist.
The BOJ said its stable inflation target of 2% has come into sight as a virtuous cycle of wages feeding demand-led inflation is solidifying. Rengo, Japan’s biggest umbrella group for labor unions, reported Friday that wage talks resulted in an initial deal for 5.28% increases, the best outcome since 1991. That fueled market speculation that the conditions were finally in place for a rate move after Ueda had repeatedly emphasized the importance of wage trends.
Some 38% of 50 economists surveyed by Bloomberg had expected the March rate liftoff, while another 54% predicted the move would come a month later. The survey was conducted before the strong results from annual wage negotiations that fueled 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 like 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.
Ueda, the first former academic to take the helm at the BOJ, had previously adjusted aspects of the ultra-easy policy settings he inherited when he became governor in April, tweaking the parameters of YCC in both July and October. Few analysts predicted Ueda would be able to unwind within a year so many policies that had become a headache for the central bank.
Ueda’s predecessor Haruhiko Kuroda launched a shock-and-awe stimulus bazooka in April 2013 with the aim of achieving 2% inflation in two years. As that goal stayed out of reach, Kuroda adopted the negative rate and then the YCC program in 2016. His focus thereafter increasingly fell on enhancing the sustainability of these monetary settings with policy tweaks.
The prolonged monetary easing led to an expansion of the BOJ’s balance sheet to the point where it’s now worth 127% of the annual economy, four times bigger than the Federal Reserve’s assets-to-economy ratio. Even so, inflation didn’t really kick in until the supply shocks triggered by Covid-19 and Russia’s war in Ukraine. Japan’s key inflation gauge has stayed at or above the 2% target for 22 months, and that stretch is forecast to continue with national price data due Friday.
Ueda’s post-decision press conference will begin at 3:30 p.m. in Tokyo. At that event he will elaborate on the thinking behind Tuesday’s policy decisions.
