Japan - BoJ March moves do not change our view of cautious hiking path

BoJ hikes policy rate in March, ends yield-curve-control

Following its two-day monetary policy meeting, the Bank of Japan (BoJ) announced earlier today it would hike its policy rate for the first time in 17 years, ending the last remaining negative interest rate policy worldwide. The policy rate was raised modestly, from -0.1% to a range of 0.0-0.1%. The BoJ also announced to discontinue its yield-curve-control framework, and end the buying of EFTs and Japanese real investment trusts (J-REITS) under its asset-purchasing programme. The central bank also stated it will gradual bring down its purchases of corporate bonds and commercial paper, aiming to end this practice in about a year.

… driven by signals of a strong rise in wage growth

The BoJ move does not come as a surprise. As we wrote in a recent Japan update, Getting closer to BoJ normalisation and yen recovery, Japan’s technical recession in 2H-2023 had been revised away, wage growth showed clear signs of an acceleration, and the BoJ’s preferred inflation measure was expected to stay above 2% this year. All of this has brought BoJ normalisation closer. Although we did not rule out the possibility of a March rate hike (with market pricing fluctuating between a 45-65% probability over the past week), the consensus (median) estimate - including ours – was for the BoJ to keep rates on hold in March. Waiting for April would have had the advantage of being able to provide forward guidance first in terms of policy rates and tweaks to its asset purchase programs/yield curve control framework. However, the latest wage developments seem to have made the difference: last Friday, the largest trade union Rengo announced an average wage increase of 5.3%, compared to 3.8% in 2024.

Governor Ueda: Accommodative policy to be maintained

And indeed, at the start of the press conference following the rate decision, BoJ Governor Ueda pointed to the virtuous link between wages and prices. He added that an accommodative policy stance will be maintained. He did not provide much guidance on how far the policy rate could be raised. Ueda stated that upward price risks could lead to more rate hikes, but that with the current outlook, the BOJ can avoid a rapid series of rate increases. The April Economic Outlook of the bank may provide more clues in that respect.

March hike does not change the likelihood of a cautious, modest hiking path for the BoJ

The fact that the BoJ already hiked in March does not change the likelihood that its hiking path will be gradual, modest, and ‘data-dependent’. This stems from the moderate growth outlook – with private consumption on the weak side –, as well as remaining uncertainties regarding the future path of inflation. Such a gradual approach will likely also be welcomed by the Japanese government, given the very high public debt ratio of around 250% of GDP (gross) and 120% of GDP (net). Regarding the ending of the yield-curve-framework, the BoJ mentioned on its website that ‘it will continue its JGB purchases with broadly the same amount as before’. It was added that ‘in case of a rapid rise in long-term interest rates, the Bank will make nimble responses, such as increasing the amount of JGB purchases’. All in all, although the BoJ has finally ended its very loose monetary policy framework, we think it will maintain a gradual, cautious approach of raising the policy rate and allowing market rates to move higher.

Still, the currency is a bone of contention

With that said, the BoJ will probably not be entirely happy with the market reaction today, and the fact that the yen weakened after the decision. The weak yen has become a sensitive political issue, and part of the goal of normalising policy would have been to trigger a trend change. Expected rate cuts by the ECB and the Fed will likely relieve some of the currency pressures on the BoJ as the year progresses, but a desire to stem currency weakness will likely be one of the motivating factors driving future rate moves. (Arjen van Dijkhuizen)

Market impact: Still room for yen recovery, BoJ looks comfortable with gradual increase in JGB yields

FX – In recent weeks the yen gained in anticipation of a change in policy. After the decision today, the yen gave all the gains of recent weeks because the statement was more dovish than expected (see above). Going forward, we still see room for yen appreciation versus USD and EUR, also given that we expect the Fed and the ECB to start a rate cutting cycle in June. (Georgette Boele)

Rates - The reaction in the JGB market to the BoJ decision was limited, despite the announcement that the central bank will discontinue the yield-curve-control framework. This limited reaction, with interest rates on the 10-year JGB falling by 2bp compared to before the decision, was partly prompted by the BoJ's statement that it would continue to buy up JGBs in "broadly the same amount as before". However, the BoJ has lowered the higher bound of the planned purchase ranges for almost all tenors, which is an indication that it is planning to buy fewer JGBs going forward, unless yields will increase more than anticipated. This is an indication that the BoJ is comfortable with a gradual increase in JGB yields. We judge that the spillover effects to global bond markets of the BoJ’s policy shift is limited, with no material impact for our European and US bond yield forecasts. (Jaap Teerhuis)