Setting itself apart from other developed country central banks, the Bank of Japan (BoJ) decided to raise the short-term interest rate from -0.1% to a range of 0.0% – 0.1% in recent weeks. This move ended a 17-year era of negative interest rates, a situation unprecedented in recent history. Additionally, it ended its control of the yield curve (although it will continue to buy sovereign bonds) and its program of buying ETFs and real estate investment trusts (REITs).
In this context, the question arises: What structural changes have occurred in the country’s macroeconomic environment? After many years of fighting deflation, Japan has been experiencing inflation above the BoJ’s 2% target since April 2022, driven by wage increases not seen in decades, the rebound in the economy, and cost increases that local companies have been able to pass on to consumers after a long period of stable and declining prices. This mix of factors has allowed company profits to rebound. There is speculation that this change in the course of monetary policy is considered a legacy of the policies introduced by Japan’s late Prime Minister Shinzo Abe with the inception of ‘Abenomics’ over a decade ago to combat two decades of a deflationary environment. Much of the optimism that the country’s equities have registered in just over a year would be supported by all of these factors and the region’s longstanding underexposure.
It is worth noting that the reaction within the financial markets was moderate, with Japanese government bond yields experiencing minimal change, the Japanese yen (JPY) experiencing some depreciation, and Japanese equities showing little change.
Finally, the question is whether the Bank of Japan will raise rates again in 2024, and if so, what will be the pace of further increase? Currently, market expectations suggest that the short-term rate could reach 0.25% by the end of the year. However, the most likely scenario points to a broadly accommodative policy stance in the near term, with gradual rate hikes. To provide further clarity, the central bank will be watching the release of the April economic report, the conclusion of the spring wage negotiations, and the inflation release (April 19) before its next monetary policy meeting on April 26. In summary, this move by the Bank of Japan, although symbolic, should be interpreted as a first step on a long road to monetary policy normalization still to come.
MSCI Japan Index cumulative price returns (%)
* Cumulative price yields shown from December 31, 1980 through February 29, 2024 in Japanese yen.
Source: Capital Group