The Bank of Japan (BOJ) yesterday raised its key policy rate to the highest level in 17 years and took a more bullish view on the strength of inflation, fueling expectations for more rate hikes and supporting the yen.
Bank of Japan Governor Kazuo Ueda and his fellow board members lifted the overnight call rate by a 0.25 percentage points to 0.5 percent at the end of a two-day meeting, the central bank said in a statement.
A hike was almost fully priced into market expectations ahead of the announcement.
Photo: Bloomberg
The decision to wait until this month to hike the rate appeared tied to the release of the upgraded forecasts and the need to keep an eye on the initial reaction to US President Donald Trump’s inauguration.
The bank flagged in its statement the relative stability of global financial markets at the moment as a favorable factor, an indication that it had been monitoring the response to the first days of the new US administration.
The yen gained as much as 0.7 percent against the US dollar to briefly reach ￥155.01 in the early afternoon in Tokyo, compared with ￥155.96 immediately before the decision.
“The BOJ rate hike is supportive for the yen and it is likely to further strengthen from here,” said Wee Khoon Chong, senior APAC market strategist for BNY in Hong Kong. “The relatively hawkish statement points to further rate hikes, which might come as soon as May upon confirmation of wage pressure.”
Ueda’s third rate hike in less than a year was widely expected after he and his deputy last week hinted that a move was in the pipeline.
That is in stark contrast with July last year, when the BOJ’s previous rate increase caught many investors off guard and contributed to a global market meltdown and the biggest ever daily drop in the Nikkei 225.
Traders had almost fully priced in a rate change, while about three-quarters of economists predicted the move in a Bloomberg survey released last week.
The rate hike followed a report earlier yesterday showing consumer prices excluding fresh food rising at a faster pace of 3 percent, well above the central bank’s inflation target.
In its outlook report, the bank raised most of its inflation projections, meaning all six of them were at 2 percent or more for the first time since it started publishing them.
While flagging the risk that the forecasts might still be on the low side, the central bank also reiterated its intention to continue raising rates if its economic outlook is realized.
The confident view on the strength of inflation is likely to reinforce a broad market perception that the central bank would look to raise rates at a gradual pace once every six months or so provided that the yen does not succumb to renewed weakness.
“What will continue to be important is the trend in exchange rates. If the BOJ raises interest rates too quickly, the yen will appreciate sharply and import prices will fall, making it difficult to achieve the 2 percent target,” said Takeshi Minami, economist at Norinchukin Research Institute, indicating that going too fast might end up putting a brake on hikes. “On the other hand, if the yen continues to weaken, politically speaking, the rise in import prices will put pressure on people’s livelihoods, and the BOJ will find it easier to raise interest rates.”
The narrowing of the gap in interest rates has implications for the currency and may offer the yen some support.
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