The Bank of Japan eliminated the world’s last negative interest rate, ending the most aggressive monetary stimulus program in modern history, while signaling that financial conditions will remain accommodative for now.
The bank’s board voted 7-2 to set a new policy rate range of between 0% and 0.1%, moving from a short-term interest rate of -0.1%, according to a statement at the end of its two-day meeting on Tuesday. The Bank of Japan also scrapped its complex yield curve control program, while pledging to continue buying long-term government bonds as needed and ending purchases of exchange-traded funds.
The lack of signs of future rate increases weighed on the yen, which fell beyond the 150 mark against the dollar, while yields on benchmark government bonds fell. The weaker currency supported Japanese stocks, helping the Nikkei 225 reclaim the key 40,000 level.
“We believe that achieving the goal of sustainable 2% inflation is within sight,” Governor Kazuo Ueda said at a news conference after the decision. “The large-scale monetary easing policy served its purpose.”
Ueda emphasized that even with the end of the negative rate, it is important that financial conditions remain accommodative.
“There is still some distance to 2%, if we look at it from the perspective of the expected inflation rate,” he said. “Considering the gap, I think we will apply a normal policy as I mentioned before, keeping in mind the importance of maintaining an accommodative environment.”
Ueda’s tone clearly showed that the BOJ’s first hike in 17 years is not the beginning of a deep tightening cycle like that seen recently in the United States and Europe.
Still, he was careful to conceal his views on political prospects during the news conference. While he promised to keep monetary policy loose until underlying price trends reach 2%, he also acknowledged that if positive wage and price trends stimulate inflation expectations, a higher risk of rising prices could result. in an increase in rates.
“The risk of a major swing higher in this trend is not great at the moment, but it is something we need to keep in mind in the future,” he said.
The central bank’s forward guidance does not offer a clear way to gauge 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 to another rate hike later this year.”
The yen’s move may offer reassurance to some export company executives and equity investors worried that a strengthening currency would reduce profits in the future. It traded down about 0.8% at 150.36 per dollar around 5:30 pm in Tokyo.
“In the stock market, foreign investors are expected to positively evaluate this BOJ policy change as a sign of structural change in the Japanese economy,” said Tomo Kinosh*ta, global market strategist at Invesco Asset Management Japan Ltd. The index closed more than 1% higher.
turning the page
By 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 peers around the world are considering cutting their rates after historically aggressive tightening campaigns.
The BOJ could not say anything about the policy path toward further increases because it will depend on incoming data, said economist Yuichi Kodama at the Meiji Yasuda Research Institute.
“But I think we should be prepared for the chances that the pace of rate hikes will come faster than expected because wages are rising so much, which will likely support consumer spending,” he said.
The BOJ’s move comes as other major central banks are set to maintain their interest rates this month. The Federal Reserve is expected to keep interest rates at their highest level in two decades for a fifth month when officials meet later this week. The Bank of England will 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 on Tuesday that its cash rate target will remain at 4.35%.
High rates and a strong U.S. currency have kept Japan’s 10-year bond yields and the yen under pressure. The yield fell to 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 will continue despite the BOJ hike, given the current strength of the US economy and the resilience of consumer spending there.
“This is a bit like the party has started, but when are you coming back? The markets will put pressure on the BOJ,” said Alicia García Herrero, chief Asia Pacific economist at Natixis SA.Play video
The BOJ said a virtuous cycle is solidifying in which wages fuel demand-driven inflation. Rengo, Japan’s largest union group, reported Friday that wage negotiations resulted in an initial agreement for 5.28% increases, the best result since 1991. That fueled market speculation that the conditions were finally in place for a rate move after Ueda highlighted the importance of wage trends.
About 38% of 50 economists surveyed by Bloomberg expected rates to take off in March, while another 54% predicted the move would come a month later. The survey was conducted ahead of strong results from annual wage negotiations that fueled widespread speculation that the central bank would not wait.
As part of its policy change, the central bank said it would also abandon the purchase of real estate investment trusts. The BOJ took the highly unusual step of buying risky assets like ETFs in 2010, eventually becoming the largest single holder of Japanese stocks, before buying operations slowed to just three instances last year. The optics of using the measure became increasingly uncomfortable as Japanese stocks hit a record high this month, raising the question of why the stock market needed support.
Ueda, the first former academic to take the helm of the BOJ, had previously adjusted aspects of the ultra-loose policies he inherited when he became governor in April, changing the parameters of the YCC in both July and October. Few analysts predicted that Ueda would be able to reverse in one 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 goal of achieving 2% inflation within two years. As that goal remained out of reach for him, Kuroda adopted the negative rate and then the YCC program in 2016. Thereafter, his attention increasingly focused on improving the sustainability of these monetary environments with policy adjustments. .
Prolonged monetary easing led to an expansion of the BOJ’s balance sheet to the point where it is now worth 127% of the annual economy, four times greater than the Federal Reserve’s asset-to-economy ratio. Still, inflation didn’t really spike until the supply shocks caused by Covid-19 and Russia’s war in Ukraine hit. Japan’s key inflation gauge has remained at or above the 2% target for 22 months, and that stretch is expected to continue with national price data due on Friday.
