Bank of Japan Ends Most Aggressive Stimulus Program in Modern History, Raising Rates Amid Uncertainty; Yen Weakens

The Bank of Japan #BOJ has completed the most aggressive monetary stimulus program in modern history, removing the world's last negative interest rate and a slew of unusual instruments while leaving the path of future hikes uncertain.

The central bank announced a new policy rate range of 0% to 0.1%, shifting from a -0.1% short-term #interestrate after stating that its inflation objective was within reach, according to a statement issued at the end of its two-day meeting Tuesday. The #BOJ also abandoned its sophisticated yield curve control #YCC scheme but pledged to continue purchasing long-term government bonds as needed. It also discontinued its acquisitions of exchange-traded funds.

The bank's message that financial conditions will stay accommodative plainly demonstrated that its first raise in 17 years is not the start of a pedal-to-the-metal tightening cycle like those seen recently in the #US and Europe. Nonetheless, its data-dependent guidance on future policy left market participants in the dark about when subsequent rate increases would occur, pushing the #JPY to fall through the $150 barrier versus the dollar.

The sustained emphasis on keeping rates low appeared to disappoint those investors anticipating for a more aggressive rate forecast, as the benchmark 10-year bond yield fell alongside the euro. The vote for the rate hike was 7-2, which may have given investors the impression that subsequent rate increases would take time. Nonetheless, analysts cautioned against assuming that further increases were out of the question.

The #JPY slid against the dollar from 149.29 before the news to as low as 150.40 afterwards. The broad Topix stock index gained around 1%. The #JPY's movement may reassure some export executives and equity investors who are afraid that a stronger currency may constrain profits in the future.

"Foreign investors are expected to positively interpret the #BOJ's policy adjustment as a sign of structural transformation in the Japanese economy," said Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan Ltd.

Governor Kazuo Ueda ended the #BOJ's experimental monetary easing program in 2016, marking the end of a period in which Japan's central bank stood out globally. The #BOJ's decision to hike borrowing costs comes as its rivals across the world consider reducing interest rates following historically strong tightening efforts.

According to economist Yuichi Kodama of Meiji Yasuda Research Institute, the #BOJ was unable to comment on the policy route toward additional hikes because it would be determined by incoming data.

"But I believe we should be prepared for the possibility that the rate hike pace would be faster than projected because wages are growing so quickly, which is likely to encourage consumer spending," he said.

The #BOJ's move comes as other major central banks prepare to keep policy rates this month. The #FED is anticipated to keep #interestrates at a two-decade high for the fifth month when officials meet later this week. At its March 21 meeting, the #BOE is expected to keep its benchmark rate at a 16-year high of 5.25%, while the #ECB earlier this month left interest rates unchanged for the fourth time. The #RBA said earlier Tuesday that its cash rate goal will stay at 4.35%.

High #interestrates and a strong #USD have weighed on Japan's 10-year yields and the #JPY. The yield fell as low as 0.725% following the decision, defying some expectations that it would rise with a rate hike and the absence of yield curve regulation.

Despite the #BOJ's raise, the interplay between Japanese and #US rates is expected to persist due to the #US economy's sustained resilience and resilient consumer spending.

The #BOJ said its 2% inflation target is within reach as a virtuous cycle of salaries feeding demand-led inflation strengthens. Rengo, Japan's largest labor union umbrella group, announced on Friday that pay talks had resulted in an initial agreement for 5.28% raises, the best result since 1991. Following Ueda's persistent emphasis on the importance of wage trends, market speculation grew that the circumstances for a rate hike were now in place.

As part of its policy move, the central bank announced that it would discontinue its purchases of real estate investment trusts. The #BOJ took the exceedingly uncommon step of purchasing risk assets such as ETFs in 2010, eventually becoming the largest single investor of Japanese stocks, before buying activities dropped to only three instances last year. The optics of implementing the measure got increasingly problematic when Japanese equities reached a record high this month, raising the question of why the share market needs help.

Ueda, the first former academic to lead the #BOJ, had previously tweaked portions of the ultra-easy policy settings he inherited when he became governor in April, changing the parameters of #YCC in both July and October. Few analysts expected Ueda to be able to unravel so many policies that had become a source of frustration for the central bank in just a year.

Ueda's predecessor, Haruhiko Kuroda, unleashed a shock-and-awe stimulus package in April 2013, with the goal of reaching 2% inflation in two years. As that target remained out of reach, Kuroda implemented the negative rate before launching the #YCC program in 2016. His focus shifted to improving the long-term viability of these monetary setups through policy changes.

The sustained monetary easing increased the #BOJ's balance sheet to the point where it is currently worth 127% of the yearly economy, four times greater than the Federal Reserve's assets-to-economy ratio. Even so, inflation did not fully begin until the supply shocks caused by Covid-19 and Russia's war in Ukraine. Japan's key inflation indicator has been at or above the 2% target for 22 months, and this trend is expected to continue with national pricing data on Friday.

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