Biscut
It took nearly a decade, but the Bank of Japan has finally called time on negative interest rates. It's even more notable when zooming out, as the BOJ hasn't raised rates in almost 17 years. Giving investors some more to chew on overnight, the central bank will also dismantle yield-curve control, which ensured that monetary policy remained loose by holding down the 10-year yield. The BOJ is also ditching purchases of risk assets like ETFs and REITs, while reducing purchases of commercial paper and corporate bonds.
Backdrop: The decision marks the end of a global era of cheap money that began in the 2010s and was employed across Europe and Japan. NIRP focused on reflating growth along with massive monetary stimulus, but inflationary pressures since the COVID pandemic and war in Ukraine resulted in aggressive tightening cycles. The Bank of Japan had been the last remaining holdout, with policymakers viewing recent price increases as imported from elsewhere, but that stance has now formally come to an end.
Helping to tame the market reaction after its latest decision, the BOJ telegraphed some of its intentions ahead of time, like the tweaking of its YCC stance. While the yen fell to 150 per dollar overnight, it didn't hamper gains for the Nikkei 225 (NKY:IND), which is continuing its record run in 2024 (+19% YTD). The move towards policy normalization also suggests the BOJ is confident it has emerged from the threat of deflation, and any rate increases over the medium term are likely to be gradual.
What about the balance sheet? "We will continue to buy roughly the same amount of bonds as in the past," BOJ Governor Kazuo Ueda said during a press conference. "As for the future, we will at some point eye shrinking our balance sheet given we've ended our extraordinary monetary easing, but I don't have any specific idea in mind on whether the next rate hike will proceed a tapering in our bond-buying or reduction in our balance sheet, or vice-versa."
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