Yesterday the Bank of Japan (BoJ) made a significant move by ending its Negative Interest Rate Policy (NIRP) and transitioning to a Zero Interest Rate Policy (ZIRP), aligning with market expectations.
At the same time, the BoJ announced the cessation of its purchases of Exchange-Traded Funds (ETFs) and Japanese Real Estate Investment Trusts (J-REITs), along with the Yield Curve Control (YCC) program.
Despite these changes, the BoJ will maintain its monthly purchases of Japanese Government Bonds (JGBs) at JPY6 trillion and will take measures to counter abrupt spikes in JGB yields. The central bank’s decision reflects its awareness of the potential impact on global bond markets and its commitment to managing JGB volatility to prevent spillover effects.
Maintaining Quantitative Easing (QE) at its current level has kept a lid on 10-year JGB yields, contributing to the depreciation of the Japanese yen following today’s announcement. Furthermore, the BoJ’s dovish stance adds downward pressure on the yen.
The BoJ is confident in the establishment of a positive cycle between wages and prices, anticipating a stable and sustainable achievement of the 2% inflation target within its forecast horizon.
However, lingering uncertainties in the economic outlook persist, with the BoJ acknowledging moderate recovery alongside some weaknesses.
Some economists interpret the BoJ’s stance as indicative of a reluctance to embark on a series of rate hikes in the near term. Market participants eagerly await Governor Kazuo Ueda’s press conference later today to gauge the extent of the BoJ’s dovishness.
Additionally, attention will be on verbal intervention possibilities, particularly with the USD/JPY exchange rate surpassing 150 once again. The aftermath of the Federal Open Market Committee (FOMC) meeting outcome presents fertile ground for potential verbal interventions.
Market commentary and analysis from Luca Santos, currency analyst ACY Securities
