As expected, the Bank of Japan has decided to raise its negative short-term interest rate by +10 basis points to 0.0% (previously -0.1-0%). This is the first rate hike in 17 years, and the central bank has also said goodbye to yield curve control.
As a concession to concerns about rising long-term rates, the bank will continue to buy 10-year JGBs in the same amounts as before (6 trillion yen per month or about $4 billion), acknowledging that short-term rates will remain the primary monetary policy tool.
But why did the USD/JPY pair jump above ¥150.00 after the news broke?
The sudden weakening of the currency could be attributed to the syndrome of buying the rumour and selling the fact. Just before the announcement, around 90% of analysts assumed the authorities would end the negative rate policy at this meeting.
This assumption gained further ground after the largest union group announced preliminary results of the annual wage negotiations that exceeded expectations. Thus, it seems to be more of a technical move.
Another thing to remember is that the Bank of Japan cannot raise rates significantly because of the government's massive debt. Therefore, even if the monetary policy had been tightened, Japan may have become less attractive to investment.
Foreign investors are unlikely to convert their currencies into Japanese yen to take advantage of higher yields. Moreover, despite recent rises, Japanese government bonds continue to offer lower yields than US 10-year government bonds.
Another factor working against the Japanese currency is the strengthening of the dollar, which is linked to the revision of the Federal Reserve's policy outlook. Although the Bank of Japan has said goodbye to negative rates, the yen is not expected to strengthen significantly.
But what are the implications for markets as a whole?
Given that yields on longer-term US debt are much higher than those on Japanese debt, it is premature to say that Japanese investors are likely to withdraw more money from the US Treasury market as yields on domestic government bonds will continue to rise.
The conclusion is that the global financial market should not contract solely because of the Bank of Japan's policy review. Moreover, even without Japan, indices, especially in the US and Europe, look somewhat overheated, given the problems in their economies.