BOJ rate hike sees yen fall as Japan markets read a less-hawkish signal
Japan’s yen weakened, bond yields fell and stocks rose after a BOJ rate increase that analysts said offered limited evidence of faster tightening.
By David L. Chen · Senior Columnist
· 3 min read
Japan’s markets moved in the opposite direction to the response commonly associated with higher interest rates after the Bank of Japan raised its policy rate on September 18. Following the BOJ rate hike yen falls became the immediate market story: the currency weakened beyond ¥157 to the dollar, the 10-year Japanese government bond yield declined and the Nikkei 225 rose 1.5%, CNBC reported.
The central bank lifted its short-term policy rate by 25 basis points, to 1.25% from 1.0%, in a 7-2 decision. The level is Japan’s highest since 1995, according to Reuters and the Wall Street Journal. The move came three months after the previous increase.
Analysts and market participants cited by CNBC and Reuters interpreted the decision as less forceful on the likely pace of future tightening than some had anticipated. That distinction is significant because currencies, bond yields and share prices can respond to expectations for policy over coming months, rather than to the latest quarter-point move alone.
Why did Japan’s markets move after the BOJ rate hike?
Two board members, Toichiro Asada and Ayano Sato, voted against the increase. Reuters reported that the yen weakened as investors focused on their arguments for patience. Hirofumi Suzuki of Sumitomo Mitsui Banking Corporation told CNBC that the dissents had surprised markets, while Nomura’s Naka Matsuzawa described the currency’s decline as a knee-jerk response to the split vote.
The vote did not change the rate decision, but it offered a signal that a unanimous appetite for faster increases was absent. Asada said core inflation was below 2% and questioned whether economic conditions were sufficiently strong, CNBC reported. Japan’s core inflation rate was 1.7% in August, down from 1.8% in July.
Communication also mattered. The BOJ’s meeting calendar shows that the September meeting was not accompanied by an Outlook Report. Masahiko Loo, a senior fixed-income strategist at State Street Investment Management, told CNBC that the absence of revised forecasts limited the bank’s ability to reinforce a hawkish message.
For the yen, international rate gaps remained part of the calculation. Reuters noted that Japan’s 1.25% policy rate was still below the European Central Bank’s 2.5% rate and the Federal Reserve’s 3.75%-4.00% target range. Bart Wakabayashi of State Street in Tokyo told Reuters that rate differentials between Japan and other major economies were central to the currency’s reaction.
What did the BOJ say about further rate increases?
Governor Kazuo Ueda later said the bank had entered a phase focused on preventing underlying inflation from overshooting its 2% target, Reuters reported. He did not rule out consecutive rate increases or moves of 50 basis points if conditions warranted.
Those remarks left open the prospect of further tightening, rather than setting a timetable or a final destination for rates. Analysts quoted by CNBC, Reuters and the Reuters-syndicated market report discussed another increase around December or a quarterly pace, but these were forecasts rather than BOJ commitments.
The rise in equities was also read through the expected policy path. Yugo Tsuboi of Daiwa Securities told Reuters that concern about a more aggressive central bank had eased, helping shares. The day’s moves do not establish how much each factor contributed, but the analyst view was that the split vote, the absence of forecasts and still-wide overseas rate gaps tempered the significance markets attached to the increase itself.
This story draws on original reporting from CNBC.
