The Japanese Yen experienced a negative response following the Bank of Japan’s (BoJ) decision to end its hostile interest rate policy. Analysts at Commerzbank provide insights into the Yen’s future.
Bank of Japan’s Policy Changes
The BoJ raised interest rates for the first time since 2007, setting the short-term policy rate between 0 and 0.1%. Additionally, the BoJ abandoned its target for long-term Japanese Government Bonds (JGBs), known as the Yield Curve Control (YCC) policy. However, the BoJ plans to continue buying JGBs at a similar rate, without a specific target. Moreover, the BoJ will halt purchases of exchange-traded Funds (ETFs) and Real Estate Investment Trusts (REITs) and gradually reduce purchases of commercial paper and corporate bonds over the next 12 months.
Limited Boost for the Yen
The symbolic shift away from negative interest rates is unlikely to boost the Yen significantly. Previous exceptions to the hostile rate policy and the small magnitude of the rate hike dampen the impact. The Yen may only benefit if the BoJ hints at further rate hikes, indicating a genuine cycle of rate increases. Market expectations have priced mainly in any other outcomes, as seen in recent statements from the BoJ.
A Dovish Rate Hike
The BoJ’s move represents a cautious step away from ultra-expansive monetary policy rather than a clear hawkish shift. The focus now turns to inflation, with further steps towards monetary policy normalization contingent on persistent inflation near the BoJ’s 2% target. However, scepticism remains regarding the sustainability of high inflation. The decision to move away from an ultra-loose policy could pose risks if inflation fails to anchor sustainably at the 2% target.
It’s crucial to monitor developments following today’s decision, as there remains a possibility that the BoJ may need to halt monetary policy normalization sooner than expected.
