Bank of Japan Abandons Negative Rates: What Now?

The Bank of Japan (BoJ) and the Japanese yen have been closely linked to negative interest rates and yield curve control policy in recent years. An aging population, deflationary pressures and global economic upheaval have forced the Japanese government to implement various measures to stimulate growth, including monetary easing policies and structural reforms.

However, last week, Japan's central bank and its governor, Kazuo Ueda, changed their monetary policy, increasing borrowing costs. Economists had expected the change in leadership at the BoJ to affect the bank's policy, but some thought such a change would come in April.

However, as the policy change has materialized, market analysts are waiting to see how the Japanese yen might be affected and whether the BOJ will raise interest rates further in the coming months.

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BOJ Raises Interest Rates

On March 18, the BoJ board announced the end of its negative rate regime after seventeen years. The press release issued after the meeting indicates that the council increased short-term interest rates from 0% to 0.1%, instead of -0.1%. The move marks the end of the most aggressive monetary easing policy in decades, as Japan's central bank has used various measures to combat deflation.

Source: MetaTrader 5 Admirals, USDJPY, Chart D1 – Period: November 24, 2023 to March 25, 2024, accessed March 25, 2024. Please note: Past performance is not a reliable indication of future results.

The BoJ director indicated that “the probability that inflation will stably reach our target has increased… the probability has reached a certain threshold which led to today's decision.” Regarding the future of the Japanese central bank's policies, it was emphasized that “accommodative financial conditions will be maintained for the time being. If the probability increases further and trend inflation accelerates a little more, this will lead to a further increase in short-term rates.

BoJ Governor Ueda Comments on the Impact of Negative Rates

BOJ Governor Kazuo Ueda addressed the impact of negative rates that have dominated the bank's monetary policy on the bond market, saying that “negative rates and other tools as part of the massive stimulus of the BoJ stimulated demand by lowering real interest rates, but also had secondary effects, notably on the functioning of the JGB market.

Source: MetaTrader 5 Admirals, USDJPY, MN Chart – Period: July 1, 2016 to March 25, 2024, accessed March 25, 2024. Please note: Past performance is not a reliable indication of future results.

Regarding the Japanese government bond purchasing program, the BoJ Governor indicated that “when we end our massive stimulus measures, we will probably gradually reduce our balance sheet and, at some point, “We will reduce purchases of Japanese bonds. At present, we do not have a clear idea on the timetable for reducing JGB's purchases, nor on reducing the size of the balance sheet.”

ING: Review April Quarterly Economic Outlook Report

ING economists pointed out that in the coming months, event risks could affect the Japanese yen. They also mentioned that the BoJ's April quarterly report will be of greater interest to the market.

In a report published on March 20, they note: “However, the general view is that the gap between Japan's interest rates and those of many other G10 central banks means that the yen will still be used as a financing currency in a low volatility world. Under our base case scenario, USD/JPY could trade around 150-152 as long as US short-term rates remain stable. When they fall over the coming months, USD /JPY should head towards the 145 area and probably near 140 later this year when the Fed easing cycle is in full swing (we expect 125 basis points of Fed cuts this year).”

MUFG Bank: The Japanese Yen will likely recover

Economists at MUFG Bank said the yen's reaction to the end of YCC (yield curve control) and the BoJ's buying of ETFs was a typical case of “buying the rumor and selling the news.” “.

Currency analysts at MUFG wrote: “We are not convinced that this initial market reaction is a sign of what is to come. The reality is that the guidance was likely intentionally left vague in order to provide some flexibility. However , Governor Ueda also clarified that upward inflation risks and/or stronger economic data would be enough to indicate additional rate hikes in the future. The BOJ is now primarily data dependent, which is a change “significant in its pattern of reaction and paves the way for greater volatility in the foreign exchange market, which should discourage the continued accumulation of yen carry trading positions at these low levels.”

Danske Bank: 3 Reasons for the Weak Yen

Despite the BoJ raising rates, the Japanese currency failed to gain ground against the US dollar. Danske Bank economists attribute this lack of dynamism to the following reasons:

1) Global markets were positioned accordingly, meaning financial markets had already priced in the decision. 2) Expectations that this was a one-time decision. 3) The rise in interest rates around the world is greater than the change made by the Bank of Japan.

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This content does not contain and should in no way be construed as containing investment advice or recommendations, an offer or solicitation to trade in any financial instruments. Please note that this marketing communication is not a reliable indicator of any current or future performance, as circumstances may change over time. Before making any investment decision, you should seek the advice of independent financial advisers to ensure that you understand the risks involved.

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