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The yen lost strength and Tokyo stocks saw an increase on Tuesday following the Bank of Japan’s decision to raise interest rates for the first time in 17 years, marking a shift away from its longstanding ultra-loose monetary policy.
With inflation consistently surpassing the officials’ two percent target and recent wage negotiations resulting in substantial increases, the BoJ felt confident enough to transition from a policy that had been unique in the global economy while other countries were increasing borrowing costs.
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The decision to hike rates was the first since 2007. This development comes as several major central banks, including those of the United States, United Kingdom, and Australia, are convening this week to make decisions on interest rates.
The BoJ also announced the discontinuation of its program that allowed government bond yields to fluctuate within a narrow range, known as yield curve control, and ceased purchasing risk assets such as exchange-traded funds and real estate investment trusts.
Despite these significant policy changes, traders reacted calmly, with Japanese stocks rising and the yen weakening against the dollar due to diminishing expectations of US rate cuts this year.
“While the Bank of Japan’s policy adjustments represent a significant departure from its previous monetary approach, the changes had been extensively communicated to the market beforehand,” said Stephen Innes from SPI Asset Management. “Consequently, the adjustments were largely anticipated, and the markets had priced them in almost perfectly.”
However, there are concerns that tighter Japanese policy could disrupt financial markets as investors redirect their funds to Japan in search of better returns while other central banks prepare to commence rate cuts.
Other Asian markets exhibited mixed performance, with gains observed in Sydney, Singapore, Taipei, Manila, Jakarta, Bangkok, and Wellington, while Hong Kong and Shanghai experienced losses. Additionally, Seoul and Mumbai also recorded declines.
Investors are now awaiting the Federal Reserve’s latest policy decision scheduled for Wednesday. Although it is expected to maintain rates at a two-decade high, it will release its “dot plot” outlook for the remainder of the year.
Recent data indicating persistent inflation, a robust economy, and a strong labor market have led to speculation that the new guidance could suggest only two rate cuts. This contrasts with earlier expectations of three cuts, with June previously considered as the likely timing for the first move.
