The End of an Era: BOJ Raises Interest Rates After 17 Years
The Bank of Japan (BOJ) has made a momentous decision by increasing interest rates by 0.10%, effectively terminating its long-standing negative interest rates policy. This marks the first interest rate hike in 17 years, ushering in a new chapter after decades of hefty monetary stimulus aimed at reflating growth.
A Shift in Monetary Policy Paradigms
With the 0.10% rate hike, the overnight call rate now ranges from zero percent to 0.1 percent, a departure from the previous range of minus 0.1 percent to zero percent used for interbank lending and borrowing.
Positive Economic Indicators
Recent dynamics in Japan’s economy have contributed to this significant move, such as the announcement by Japan’s largest labor union federation, Rengo, of an average pay raise of 5.3% in the annual spring wage negotiations – the highest increase in 33 years. Moreover, Japan’s key inflation gauge has surpassed or maintained the BOJ’s 2% inflation target for 22 consecutive months, primarily due to heightened import costs.
Changes in Monetary Policy Implementation
As part of its strategic shift, the BOJ has abandoned yield curve control, a policy initiated in September 2016. This involved substantial purchases of Japanese government bonds to sustain short-term yields near minus 0.1% and long-term yields close to zero. Furthermore, the BOJ has declared an end to the purchase of exchange-traded funds and Japan real estate investment trusts (J-REITS), with a gradual reduction in corporate bond purchases over the coming year.
Continuation of Key Initiatives
While modifying its approach in various areas, the BOJ will uphold its commitment to acquiring Japanese government bonds at a level similar to previous efforts, maintaining stability in this crucial financial instrument.
Market Sentiment and Reactions
Following these pivotal changes, the Nikkei 225 index responded positively, rising by 0.25% to reach 39,799.00. Additionally, the USD to JPY exchange rate experienced an upward trend, increasing by 66 basis points to 149.797.
Reflecting on Exchange-Traded Funds
Notable movements were observed in ETFs post-announcement, with tickers like NYSE:JEQ, NYSEARCA:EWJ, NYSEARCA:DXJ, and NYSEARCA:FXY showing fluctuations indicative of shifting market dynamics.