JPMorgan chief global strategist David Kelly said markets were in for a “difficult” few days and that inflation was gradually declining in the “Cramman countdown”.
The Bank of Japan (BOJ) on Tuesday ended eight years of negative interest rates and other unconventional policies, marking a historic shift away from focusing on mirroring growth from decades of massive monetary stimulus. I did it.
The move is Japan’s first rate hike in 17 years, but analysts say interest rates remain near zero as a fragile economic recovery makes the central bank less sensitive to further rises in borrowing costs.
The shift would make Japan the last central bank to lift negative interest rates, ending an era in which policymakers around the world sought to prop up growth through cheap money and non-traditional financial instruments.
“Like other central banks, we have returned to normal monetary policy targeting short-term interest rates,” Bank of Japan Governor Kazuo Ueda said at a press conference after the decision.
Bank of Japan Governor Kazuo Ueda holds a press conference at the central bank’s headquarters in Tokyo on December 19, 2023. (Kiyoshi Ota/Bloomberg via Getty Images/Getty Images)
“If the inflation trend picks up a bit more, it could lead to a rise in short-term interest rates,” Ueda said, without elaborating on the pace or timing of further rate hikes.
In a widely anticipated decision, the Bank of Japan scrapped a policy introduced since 2016 by former Governor Haruhiko Kuroda that applied a 0.1% fee to some financial institutions with excess reserves deposited with the central bank.
The Bank of Japan has set the overnight call rate as the new policy rate, and has decided to guide the rate within a range of 0-0.1%, including paying an interest rate of 0.1% on central bank deposits.
“Today, the Bank of Japan has taken its first tentative steps towards policy normalization,” said Frederick Newman, chief Asia economist at HSBC in Hong Kong.
“In particular, the abolition of negative interest rates shows the Bank of Japan’s confidence that Japan has broken free from the spell of deflation.”
The central bank also abandoned yield curve control (YCC), a policy introduced in 2016 that caps long-term interest rates at near zero, and halted purchases of risky assets.
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But the Bank of Japan said it would continue to buy “roughly the same amount” of government bonds as before and would expand purchases in case yields rise rapidly, underscoring its focus on preventing a harmful spike in borrowing costs. emphasized.
The Bank of Japan also hinted that future interest rate hikes would be gradual, predicting that “accommodative financial conditions will be maintained for the time being.”
Japanese stocks rose in response to this decision. The yen JPY=EBS fell below 150 yen to the dollar, as investors took the Bank of Japan’s dovish guidance as a sign that the difference in interest rates between Japan and the United States is unlikely to narrow much.
“Ordinary country”
Inflation has been above the Bank of Japan’s 2% target for more than a year, and many market participants expected negative interest rates to end in March or April.
Hopes for a turnaround rose significantly this week after annual wage negotiations between unions and major companies delivered the biggest pay rise in 33 years.
A man walks in front of the Bank of Japan head office in central Tokyo on March 19, 2024. (Richard A. Brooks/AFP via Getty Images/Getty Images)
With the end of the Kuroda administration’s economic stimulus program, the attention of markets, analysts, and the broader public has shifted to when the Bank of Japan will raise interest rates again.
Already on Tuesday, commercial banks flagged plans to partially raise deposit rates for the first time since 2007. Both Nomura and BNP Paribas expect the Bank of Japan to raise rates again by the end of the year.
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“Essentially we are a normal country,” said Bart Wakabayashi, head of State Street’s Tokyo branch.
“What impact does this have on local households and their purchasing power? I think that’s going to be the next big discussion. With that in mind, I don’t think the Bank of Japan can do much more than what they’ve announced.”
Under the Kuroda administration, the Bank of Japan introduced a massive asset purchase program in 2013, with the original aim of raising inflation to a 2% target within about two years.
The central bank introduced negative interest rates and YCC in 2016 as slowing inflation forced it to adjust its stimulus program to be more sustainable.
However, the Bank of Japan tweaked the YCC last year to loosen its grip on long-term interest rates, as the sharp decline in the yen raised the prices of imported goods and heightened public criticism of the disadvantages of Japan’s ultra-low interest rates. .
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There are still risks. The sharp rise in bond yields will raise the cost of financing Japan’s massive public debt, which is twice the size of its economy and the largest among developed countries.
The end of cheap money could also shake up global financial markets, as Japanese investors who had flocked overseas in search of yield return their funds to their home countries.
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Despite scaling back stimulus, the Bank of Japan downgraded its assessment of the economy and warned of weakness in consumption.
Ueda said inflation expectations were not yet pegged at 2%, meaning the Bank of Japan could raise interest rates at a slower pace than other central banks have done in recent years.
Regarding the possibility of a threshold for further interest rate hikes, Mr. Ueda said, “If our price outlook clearly exceeds, or even if the median price remains unchanged, if the risk of an upside to our price outlook clearly increases.” “This will lead to policy changes.”
