Japan: Finally… a rate hike

As had been looking more likely after recent strong wage settlement figures, the Bank of Japan (BoJ) decided to finally raise their policy rate out of negative territory. From -0.1%, the BoJ have announced a new target range of 0.0-0.1%.

They also scrapped the yield curve control programme and have formally ended their purchases of ETFs (Exchange Traded Funds). They will, however, keep buying government bonds, although during the press conference BoJ Governor Kazuo Ueda did say that they want to consider cutting back on bond buying in the future.

Japanese policymakers had been signalling for some time that they wanted more evidence that Japan will be able to sustainably hit its inflation target before raising rates. Wage growth has been of key importance in this assessment and last week’s strong pay settlements figures likely helped give them the confidence to raise rates.

According to the statement, accommodative conditions will be maintained “for the time being”. Governor Ueda said that there is “some distance” for inflation expectations to reach 2% and that he was still not 100% certain of hitting the price goal. The statement itself said that the sustainable/stable achievement of the 2% inflation target was in sight “towards the end of the projection period” (rather than being here already). During the press conference, Ueda said that with the current outlook, the BoJ can avoid a rapid series of rate increases.

Such a small move is more symbolic than economically substantial. Such a low interest rate still leaves Japanese monetary policy looking accommodative. It will be worth watching for any impact on business and consumer confidence following the move, but a rate rise has been anticipated for some time by economists at least, even if the precise timing was uncertain.

The case for interest rates beyond today will likely depend significantly on wage and inflation developments and ultimately whether we see further evidence that Japan is now in some form of higher nominal growth/inflation paradigm. Governor Ueda said that one condition to change policy going forward would be if the BoJ forecasts bigger upside risks to the price goal. Forward signalling at today’s meeting was relatively limited, but did not suggest that the BoJ feel any particular hurry to raise rates further.

The Multi Asset team view – Hiroki Hashimoto, Multi Asset Fund Manager

Japan made an exit from the negative interest rate policy and raised rates for the first time in 17 years after the BoJ had prepared markets for this historic move. We’ve been positive on Japanese equities since the second quarter last year, with their corporate earnings supported by a historically weak yen and improvements in corporate governance. While their next policy move will depend on inflation dynamics in Japan, absent global recessions, their interest rates will likely stay at very low levels relative to global counterparts and we remain positive on Japanese equities for now.

The Rates & Cash team view – Gareth Hill, Government Bond Senior Fund Manager

The adjustments to monetary policy were widely anticipated by the bond market, having been telegraphed over recent days with very little pushback from the BoJ. Japanese government bonds (JGBs) have been something of a consensus underweight/short in markets, with Japanese yields looking somewhat anomalous in a global context (notwithstanding the positive carry from hedging yen exposure back to other major currencies).

In the event, JGBs actually rallied following the announcement, with markets choosing to focus more on the continued buying of bonds by the BoJ, as opposed to the tightening measures. Communication from the BoJ was also clear that this was not anticipated to be the start of an aggressive hiking cycle, but more of a move towards policy normalisation, and that they would act to ensure markets remained orderly and volatility remained suppressed, through flexible buying of bonds. So, the immediate impact was not the sell-off that many had positioned for, and the rally could be attributed to short covering by market participants.

In the medium to longer term however, we still feel that the level or rates and yields are inconsistent with the economic data, particularly inflation and wage data, and expect yields to grind higher.

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