On Tuesday March 19, 2024, the Bank of Japan (BoJ) ended its decade-long measures to beat deflation, and lifted its deposit rate from -0.10%, removed its 10-year bond yield cap and set its new key interest rate at 0.00-0.10%.
The first and historic BoJ rate hike since 2007 came earlier than some forecasts of April. The BoJ’s 2% inflation target is in sight after Japan’s spring wages showed strong salary increases of 5.3% at large firms. Teh BoJ said "it is highly likely" that wages will continue to increase steadily this year.
Mansoor Mohi-uddin, chief economist at the Bank of Singapore, said that importantly for equities, the BoJ had kept its outlook “dovish” as expected. The Nikkei finished up 0.66% at 40,003 on the same day.
Mohi-uddin noted that the BoJ has said that financial conditions are set to remain "accommodative" and has given no signal that a further interest rate hike is likely. The BoJ said "given the current outlook for economic activity and prices, the Bank anticipates that accommodative financial conditions will be maintained for the time being."
In addition, the BoJ has said that it will still print money and buy bonds around its current pace of €6 trillion (around $40 billion) a month, to stop yields rising sharply. The BoJ stated that it "will continue its Japanese government bond (JGB) purchases with broadly the same amount as before." It added a caveat that "in case of a rapid rise in long-term interest rates", the BoJ will make "nimble responses."
According to Mohi-uddin, the BoJ’s dovish rate hike appears unlikely to stop this year’s strong rally in Japanese equities. Japan was also an equities bright spot last year after a number of major IPOs and other deals. However, the yen slipped to around 150 against the US dollar.
In another positive, the Bank of Singapore economist said he expects that the currency will rebound when the US Federal Reserve cuts interest rates -- probably later this summer.
