The Bank of Japan (BOJ) today raised interest rates to 0.25% from 0% in a move that the Japanese central bank hopes will signal the end of a lengthy period of deflation and a decade-long economic slump.
Japanese interest rates, which have remained frozen at zero for almost six years, are now following a tightening cycle already embarked upon by central banks in Europe and the US.
Today's decision will contribute to ensuring price stability and achieving sustainable growth in the medium and long term,” said the BOJ in a statement.
Neil Mellor, a currency strategist at the Bank of New York, said: “The immediate reaction (to the interest rate rise) has been for people to sell the yen. There was an element in the market that expected a more aggressive statement by the BOJ.”
But he added: “Although the BOJ has said interest rates should be kept low. It is healthy to see that in a flexible way. It will say whatever it takes to placate the Ministry of Finance, which has been looking for supportive policies from the Bank for quite some time.”
Ten-year yields fell back from 1.9% to 1.8% on the back of the quarter-point rise. But Ian Stannard, a senior currency strategist at BNP Paribas, said 10-year yields would continue to be watched closely by Japanese pension funds and fund managers, which are expected to favour the domestic market over foreign locations, should yields rise to 2%.
This will be a further signal of the improving fortunes of the Japanese economy, which will surpass its longest sustained period of post-war economic growth if the current recovery lasts until October (see: Return of a Heavyweight, Risk June 2006).
“But the BOJ is looking to prevent yields from rising too quickly,” Stannard cautioned. “You also need to watch the yield curve in the US. The inverted yield curve is weighing on the yen but if it re-steepens the yen will benefit as a result of Japanese investor hedging activity.”
The BOJ today reaffirmed its plans not to embark on consecutive rate hikes, such as those implemented by the US’s Federal Reserve. The Japanese central bank said interest rates would rise “gradually” and stay at a “very low” level.
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