Key Takeaways

  • The Bank of Japan (BoJ) finally exited the era of highly unconventional monetary policy, voting 7-2 to end negative interest rates and yield curve control. ETF and REIT purchases will also end. Commercial paper and corporate bond purchases will be scaled back.
  • The move was broadly expected and priced by markets following a series of media leaks. The sell-off in the yen and small fall in bond yields is consistent with markets taking a “buy the rumour, sell the fact” approach to what is likely to be a very limited hiking cycle. 
  • The new policy framework appears aimed at engineering a smooth transition to conventional policy, with short-term rates the primary policy tool for the first time since 2007.
  • In the press conference, Governor Ueda acknowledged both progress made in inflation and uncertainties ahead. 
  • Further rate hikes will depend on the scale of wage and price hikes that materialise at the start of the new fiscal year. While the early evidence from the Shunto negotiations is encouraging, this strength needs to filter into realised wage growth, especially for smaller firms. And it is not clear whether firms have pricing power to push through increases as part of a virtuous wage/price dynamic. 
  • We expect additional tightening to be limited, as domestic inflation pressures are likely to continue to ease over coming months.


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