5 key points of Bank of Japan interest rate decision
BOJ ends era of negative rates with few clues on further hikes
End of negative rates
Abolition of YCC
Halt in ETF purchases
- End of negative rates: BoJ has raised the benchmark interest rate from -0.1% to 0-0.1%, in line with market expectations. This marks the first rate hike since 2007, officially ending the era of negative interest rates that lasted for 8 years.
The bank’s indication that financial conditions will remain accommodative clearly showed its first hike in 17 years isn’t the beginning of a pedal-to-the-metal tightening cycle of the sort seen recently in the US and Europe. Still, its data-dependent guidance on future policy left market players in the dark about when subsequent rate increases will take place, prompting a slide in the yen through the 150 mark versus the dollar.
- End of YCC policy: BoJ has abolished the Yield Curve Control (YCC) policy but will continue its JGB purchases with broadly the same amount as before. It may increase purchases of Japanese government bonds and conduct fixed-rate purchase operations if long-term interest rates rise rapidly.
- End of ETFs and REITs purchases: BoJ will cease purchasing ETFs and Real Estate Investment Trusts (REITs). It will gradually reduce the amount of commercial paper and corporate bond purchases.
- Removal of previous pledge: The previous pledge to "not hesitate to take additional easing measures if necessary" has been removed.
- Price stability target: BoJ has judged that the price stability target of 2 percent is within sight and would be achieved in a sustainable and stable manner.
The continued insistence on keeping conditions easy appeared to disappoint some investors looking for a more aggressive rate outlook, with the benchmark 10-year bond yield falling along with the currency. The vote for the rate hike was 7-2, another factor that may have given investors the view that further rate increases will take time. Still, economists warned against reaching the conclusion that more hikes were off the table.
The forward guidance has become too simple to figure out the pace of rate hikes. At the same time, the BOJ is keeping the door open for another rate hike later this year.
The yen fell against the dollar from 149.29 just before the announcement to as weak as 150.40 afterwards. The broad Topix stock index rose about 1%. The movement in the yen may reassure some export company executives and equity investors concerned that a strengthening of the currency would squeeze profits going forward.