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Bank of Japan Ends Negative Rates: What’s Next?

Last Updated March 19, 2024 12:25 PM
Giuseppe Ciccomascolo
Last Updated March 19, 2024 12:25 PM

Key Takeaways

  • The Bank of Japan (BoJ) raised its short-term interest rate, marking the first hike in 17 years.
  • The BoJ believes its previous policies achieved their goals and aims to achieve price stability with a 2% inflation target.
  • But the yen weakened against the dollar as investors perceived the BoJ’s move as insufficient, and future hikes remain uncertain.

In a highly anticipated move, the Bank of Japan made a significant shift  on Tuesday, March 19, 2024, by ending its long-standing negative interest rate policy.

The Japanese central bank declared that its monetary easing policy and yield curve control program had effectively served their purposes. Consequently, it opted to raise its short-term policy rate to a range of 0.0% to 0.1%. This is a departure from the previous minus 0.1% rate. Notably, this marks the first interest rate hike by the BoJ in 17 years.

End Of Negative Interest Rates

Explaining  its decision, the BoJ cited its assessment of the positive correlation between wages and prices, expressing confidence that its 2% price stability target would be attained in a sustainable manner by the end of its forecast period.

Since 2016, the BoJ has adhered to an unconventional policy of maintaining sub-zero interest rates. This is to incentivize banks to increase lending and stimulate economic activity, especially in the face of deflationary pressures.

The introduction of the yield curve control program, initiated after implementing negative rates, aimed to manage short to medium-term interest rates for corporate borrowing while avoiding adverse impacts on longer-term yields, crucial for pension funds and life insurers.

Despite the policy shift, the BoJ expects financial conditions to remain accommodating in the near term. Notably, recent pay negotiations between unions and employers, coupled with anecdotal evidence, led the BoJ to anticipate a steady increase in wages throughout the year. Japan’s largest trade union, Rengo, reported  a substantial average pay rise of nearly 5.3%. This marked the highest increase in 33 years.

The anticipation of an end to negative rates gained momentum last week. In particular, it increased following the favorable outcomes of the wage negotiations, reinforcing market expectations.

Outlook Remain Cautious

While Japan’s economic recovery is projected to continue moderately, the BoJ remains cautious. This is due to the potential drag from slowing economic growth overseas. Nevertheless, it foresees the strengthening of the virtuous cycle from income to spending. This is expected  to underpin further economic expansion.

Despite overall balanced risks to economic activity and prices, the BoJ underscores the entrenched societal mindset stemming from prolonged low growth and deflation. It emphasized the importance of closely monitoring the intensification of the virtuous cycle.

The BoJ expressed its expectation for the continuation of “accommodative financial conditions” in the foreseeable future. Governor Kazuo Ueda reiterated  this sentiment during the subsequent press conference.

According to Commerzbank, the yen will strengthen only if the BoJ signals potential further rate hikes. They argue that despite the market’s anticipation of tightening measures in recent weeks, the BoJ’s latest statement still leaves room for uncertainty regarding a definitive shift towards a tightening cycle.

Commerzbank remarked : “The latest statement from the BoJ introduces some ambiguity regarding the initiation of a genuine hiking cycle. While the BoJ did initiate a departure from its extremely loose monetary policy with its recent rate hike, it wasn’t a resolute hawkish pivot. Rather, it leaned towards a dovish approach to rate adjustments.” Analysts emphasized that the critical factor moving forward is likely to be the trajectory of inflation.

This analysis underscores the cautious stance taken by the BoJ in its policy adjustments and suggests that market participants will closely monitor indicators of inflation as potential signals for further policy shifts.

What’s Ahead?

The Bank of Japan’s affirmation  of maintaining accommodative financial conditions indicates that its first rate hike in 17 years does not mark the initiation of an aggressive tightening cycle akin to recent moves seen in the U.S. and Europe.

However, the BOJ’s reliance on data to guide future policy decisions has left investors uncertain about the timing of subsequent rate adjustments. This leads to a depreciation of the yen beyond the 150 mark against the dollar.

The persistence of high-interest rates and a robust currency in the U.S. has exerted downward pressure on Japan’s 10-year yields and the yen. Contrary to some expectations of an uptick following the rate hike and the cessation of yield curve control, Japan’s 10-year yield slipped to as low as 0.725% post-announcement.

The interplay between Japanese and U.S. interest rates may persist despite the BoJ’s rate hike, fueled by the enduring strength of the U.S. economy and resilient consumer spending trends there.

“The USD/JPY exchange rate has further decreased, reaching 150.28. This is a clear signal that the market did not appreciate the decision of the Bank of Japan. This decision appears to be a relatively insignificant compromise and has disappointed the expectations of those hoping for a more substantial change in monetary policy,” ActivTrades senior analyst Saverio Berlinzani told CCN.

“The BoJ seems to be concerned about the potential inflationary pressures stemming from wage hike agreements. But in the eyes of the market, this move appears to be perceived as falling short of expectations. It remains to be seen whether the BoJ will intervene to support the Japanese currency,” Berlinzani added.

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