Bank Of Japan Exits Negative Rates: What’s Next?

The Bank of Japan (BoJ) and the Japanese yen were closely connected with negative interest rates and yield curve control policy in the last few years. Aging population, deflationary pressures, and global economic shifts forced the Japanese government to implement various measures to stimulate growth, including monetary easing policies and structural reforms.

However, last week, the central bank of Japan and its Governor, Kazuo Ueda, altered its monetary policy , lifting borrowing costs. Economists expected the change of guard in BoJ’s leadership to affect the bank’s policy, but some believed such a move would take place in April.

Nevertheless, as the policy shift materialised, market analysts expect to see how the Japanese yen could be affected and whether the BoJ would push rates even higher in the next few months.

BoJ Raises Interest Rates

On March 18th, the BoJ’s governing council announced the end of its negative rates regime after seventeen years. Its post meeting statement indicated that the board raised short-term interest rates to 0% to 0.1% from -0.1%. The decision marked the end of the road for the most aggressive monetary policy easing recorded in the last decades as Japan’s central bank used various measures to combat deflation.

The BoJ’s head mentioned that “the likelihood of inflation stably achieving our target has been heightening ... the likelihood reached a certain threshold that resulted in today’s decision.” Regarding the future of course of the Japanese central bank policies, it was stressed that “accommodative financial conditions will be maintained for the time being. If the likelihood heightens further and trend inflation accelerates a bit more, that will lead to a further increase in short-term rates.”

BoJ Governor Ueda Comments On Negative Rates Impact

The BoJ’s head Kazuo Ueda spoke about the impact of negative rates that dominated the bank’s monetary policy on the bond market saying that “negative rate and other tools under BoJ's massive stimulus had boosted demand by pushing down real interest rates but had side-effects too such as on JGB market function.”

Regarding the Japanese government bonds purchase programme, the BoJ’s Governor mentioned that “as we end our massive stimulus, we will likely gradually shrink our balance sheet, and at some point reduce JGB purchases. At present, we have no clear idea on timing of reducing JGB buying, scaling back size of balance sheet.”

ING: Scrutinise The April Quarterly Outlook Report

ING economists stressed that in the next few months, there will likely be event risks which could affect the Japanese yen. They also mentioned that the BoJ’s April Quarterly Outlook report will be of greater interest to the market.

In a report published on March 20th, they note: “However, the broad-based view is that the gulf in interest rates between Japan and many other central banks in the G10 space mean that the yen will still be used as a funding currency in a low-volatility world. Our baseline view now sees USD/JPY perhaps trading around the 150-152 area as long as short-term US rates stay firm. When they turn lower over the coming months, USD/JPY should head down to the 145 area and probably close to 140 later this year when the Fed easing cycle is in full swing (we look for 125bp of Fed cuts this year).”

MUFG Bank: Japanese Yen Will Likely Stage A Recovery

MUFG Bank economists said that the Yen’s reaction to the end of the YCC and purchase of ETFs by the BoJ was a typical case of “buy the rumour and sell the fact.”

Currency analysts at MUFG wrote: "We are unconvinced that this initial market reaction signals what’s to come. The reality is that the guidance has likely been left purposely vague to provide flexibility. However, Governor Ueda was also clear that upside inflation risks and/or stronger economic data would be enough to indicate additional rate hikes going forward. The BoJ is now essentially data-dependent which is a big change in the BoJ reaction function and opens up the scope for greater FX volatility that should discourage a further build-up of yen carry positions at these weaker yen levels.”

Danske Bank: 3 Reasons For The Yen’s Weakness

Despite the rate hike by the BoJ, the Japanese currency failed to gain ground against the US dollar. Economists at Danske Bank attribute the lack of momentum to the following:

1)global markets were positioned for this, implying the financial market had already discounted the decision 2) expectations that this was a one-off move 3) the rise in global interest rates matters more than the tweak the BOJ presented.

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