March 19, 2024 (MLN): The Japanese yen plunged more than 0.8% past 150 per US dollar after the Bank of Japan ended the world’s last negative policy rate by raising its key benchmark rate by 10 basis points (bps) from -0.1% to 0% for the first time since 2007.

However, 10-year bonds advanced slightly on the BOJ’s dovish tone. The benchmark Topix index rose 1.06% while the Nikkei 225 climbed 0.66%.

USD/JPY Intraday Performance

Ahead of the decision some 90% of central bank watchers had seen the risk of authorities ending their negative rate settings at the meeting, as Bloomberg reported.

The likelihood had been bolstered after the largest union group announced first-round results to annual wage negotiations that exceeded expectations.

“The decision today itself may be considered quite dovish, dragging the yen lower,” said Koji Fukaya, a fellow at Market Risk Advisory Co. in Tokyo, who said the ending of negative rates and yield-curve control was already priced in. “Keeping an accommodative stance does not mean they will not raise rates from here and therefore, investors would need time to assess the policy outlook.”

The yen had weakened slightly over the course of the week leading up to the BOJ decision as the dollar appreciated on the outlook for slowing rate cuts from the Federal Reserve.

Expectations for the yen to outperform its peers this year had all but evaporated recently, with strategists earlier this month forecasting the currency to end 2024 within a few percent of where it started.

Meanwhile, benchmark 10-year Japanese government bond yields had been edging higher while the nation’s stocks have rallied this year, with the Nikkei 225 reclaiming the high it set back in 1989.

High rates and a strong currency in the US have kept Japan’s 10-year yields and the yen under pressure, the 10-year US Treasury yield is around 4.3%.

The dynamic looks set to continue despite the BOJ’s hike given ongoing strength in the US economy and resilient consumer spending there. In addition, Japan’s central bank will continue to buy bonds and pledges to respond to any rapid rise in yields.

The “new era” of positive interest rates is “a confirmation of the recovery in Japanese economy,” said Charu Chanana, market strategist for Saxo Capital Markets Pte.

“Higher returns on savings and investments in Japan can fuel spending power for consumers, and builds a case for Japanese equities to extend their momentum,” she added.

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Posted on: 2024-03-19T12:01:15+05:00