Neon signs in Dotonbori district, Osaka, Japan
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The Bank of Japan on Tuesday finally ended its experiment with negative interest rates and unconventional easing tools aimed at spurring reflation in the world’s fourth-largest economy.
Bank of Japan Decide Just a few days ago, Rengo, Japan’s largest trade union federation, said that ongoing “diversion” wage negotiations between Japanese companies and unionized employees have so far resulted in a provisional weighted average increase in basic wages of 3.7%. That’s stronger than last year’s gains, which were the highest in three decades.
Bank of Japan Governor Kazuo Ueda has repeatedly said those talks will be key to sustainable price increases, which would inform any decision to raise interest rates for the first time in 17 years. Bank of Japan policymakers expect rising wages to lead to a virtuous spiral, with domestic demand driving inflation.
Before Tuesday, the Bank of Japan had made little change in its ultra-loose monetary policy stance as policymakers saw rising prices, even though “core inflation” – which excludes food and energy prices – had exceeded its 2% target for more than a year. Mainly imported from overseas.
“The Bank of Japan has taken some bets today because they expect that large wage increases at a large number of companies will actually lead to an increase in household spending,” Rob Carnell, head of Asia-Pacific research at ING, told CNBC on Tuesday. The Bank of Japan released the policy statement after its March policy meeting. Decide.
“Right now, they don’t know that,” he warned.
The Bank of Japan will now seek to use short-term interest rates as its main policy tool. From March 21, an interest rate of 0.1% will be implemented on current account balances deposited by financial institutions with the central bank, while the unsecured overnight lending rate (another interest rate used by banks as policy leverage) is encouraged to remain around 0 to 0.1% – Effectively raising interest rates from the previous -0.1%.
Shortly after the Bank of Japan announced the news, Japan’s largest banks, including Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Groupannounced that it would increase the interest rate on ordinary yen deposits.
There are some other highlights from its policy decisions:
- It said it would scrap yield curve controls, which are used to cap long-term interest rates near zero; and stop buying exchange-traded funds and Japanese real estate investment trusts.
- The Bank of Japan has also pledged to gradually slow down its purchases of commercial paper and corporate bonds, with the goal of halting the practice in about a year.
- If long-term interest rates rise rapidly, it will adopt a “flexible response”, including increasing purchases of Japanese government bonds and fixed-rate purchases of Japanese government bonds.
CNBC takes a look at what happens next:
short term market impact
Tuesday’s decision triggered a sharp sell-off in stocks The yen fell above 150 yen Dollar – This level has previously prompted the Japanese authorities to intervene.
Ueda said at a press conference after the decision that a “quick” rate hike was unlikely given the fragile economic outlook – a view that may disappoint some yen bulls, said Michael Brown, senior research strategist at currency broker Pepperstone. . .
Indeed, in its initial press release, the Bank of Japan warned that it would not raise interest rates significantly and said it “expected accommodative financial conditions to remain for the time being.”
At a press conference on Tuesday, Ueda did not commit to a timetable for shrinking the BOJ’s balance sheet or give any clear indication of further interest rate hikes.
Bank of America’s global rates team – among market players predicting the BOJ’s move after a flurry of local Japanese news reports last week – said they expected the global impact to be “limited” as the action was already justified .
The Bank of America team also pointed out that the removal of the yield curve control framework by the Bank of Japan does not mean that government bond (JGB) yields will rise significantly. This may be because the Bank of Japan said it will continue to buy “roughly the same amount” of government bonds as before – currently about 6 trillion yen per month.
Barclays economist says reduce The cap on the size of Japanese government bond issuance shows the Bank of Japan is seeking to gradually reduce the size of its purchases.
Longer-term concerns
One of the biggest concerns is the scale of deportations to Japan.
Japan’s decades of easy monetary policy – even as other global central banks have tightened policy in the past 12 months – has also focused carry trades on the yen because of wide interest rate differentials between Japan and the United States and the rest of the world. Keep the yen weak. A carry trade involves borrowing a low-yielding currency to fund investments in higher-yielding assets elsewhere.
The unwinding of traditional yen carry trades and the return of Japanese capital to its domestic bond market could trigger broader volatility. With interest rates artificially low in the domestic market for years, Japanese investors looked for better returns elsewhere.
But Vishnu Varathan, chief Asia ex-Japan economist at Mizuho, said that with the Bank of Japan unlikely to raise interest rates significantly, the current spread of more than 300 basis points between U.S. Treasuries and JGBs seemed unlikely to fall significantly.
“And (the Fed’s) unexpected dovish turn is a different proposition entirely.”
The Federal Reserve will announce its own rate decision on Wednesday.
Hayden Briscoe, head of multi-asset portfolio management for Asia Pacific at UBS Asset Management, said that in the long run, bond yields will gradually rise, “for example, 25, 50 points, to ensure market functioning. “
Briscoe believes it will take some time for the Bank of Japan to make more adjustments to its benchmark interest rate, noting that “they don’t want to scare people away with a big rise in short-term rates while (yields) are lower than expected for the full year.” pressure. “
Therefore, he believes what the central bank will do is let the longer end of the yield curve start to slowly “push” higher, and then if the BOJ sees demand and prices rising due to rising wages, then the central bank will “start” pushing the cash rate again. “
Briscoe did say, however, that the move won’t happen anytime soon.
“Whether the Bank of Japan decides to raise interest rates slightly is not a focus of the March or April meeting. We will focus on the overall picture of the policy shift announced and its impact on wider economic expectations.” Likewise, HSBC Global Fixed Steven Major, head of earnings research, said in a report ahead of the Bank of Japan’s historic move.
“Big things are about to happen in Japan,” he added.
—CNBC’s Shreyashi Sanyal contributed to this article.
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