Last week, the Bank of Japan raised its benchmark interest rate to 0%, the first hike since 2007. With it came an end to the yield curve control policy the central bank had first implemented in 2016. To say that it was an historic day for Japan would be putting it mildly.
Unfortunately, it now presents a real problem for the BoJ and raises potentially more questions than answers. The fact that the central bank raised rates by a mere 10 basis points and offered no timeline for when rate hike #2 might come seems rather mild. Plus, the BoJ may have officially ended yield curve control, but it’s also going to continue making bond purchases to the tune of around 6 trillion yen per month, roughly the same amount it was making when yield curve control was in place.
So my question is this: if the BoJ is only going to make one 10 basis point rate hike and continue with bond purchases indefinitely, has anything really changed or is this just a “pivot” in name only?
The markets seem to think it’s the latter. They were expecting more of a hawkish move (or at least more of a hawkish tone) that was going to finally send the yen rallying higher. Instead, they got this.
The BoJ’s rate announcement happened on Monday night U.S. time. The yen immediately plunged following the news release and has remained suppressed ever since. Reverse this chart and you’ve got the current exchange rate sitting at more than 150 per dollar.
Keep in mind that this level is important. The Bank of Japan has traditionally placed a soft cap at the 150 level where it starts to consider intervening in the forex market to defend the yen. It’s been above that level since the BoJ meeting and has already generated remarks from Japan’s Ministry of Finance that it may be getting ready to make a move right now.
What’s With The Responses From The BoJ And The Fed?
This leaves me with two big questions - 1) why did the Bank of Japan come in so gentle with its first policy change and 2) why did the Fed follow it up with a surprisingly dovish stance of its own?
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