The Bank of Japan Ended the Negative Rates Era & Scrapped the Yield Curve Control

Bank of Japan Historic Pivot

Trying to fight decades of deflation and spur economic growth after Japan's Lost Decades, the central bank reverted in 2016 to unconventional and ultra-dovish monetary measures. These included negative interest rates, yield curve control that caps long-term bond yields, along with Quantitative and Qualitative Monetary Easing (QQE).

Even though they had taken steps towards normalization, policymakers had been reluctant to change tack, as they wanted to make sure they will achieve the 2% inflation target in a sustainable and stable manner, together with wage increases. But with the country avoiding a recession, core inflation (ex fresh food) above the 2% target for nearly two years and encouraging signals from the ongoing wage negotiations, officials could not postpone a change any longer.

In a watershed moment after almost a decade, the Bank of Japan decided to abandon its unorthodox uber-loose policies, judging they had "fulfilled" their roles. Officials ended the negative rate regime, hiking it to "around" 0.0-0.1%, the first increase since 2007. They scrapped the yield curve control, they will stop buying ETFs and J-REITs and they will reduce purchases of commercial paper and corporate bonds before eventually discontinuing them. ^[1]

The move can have significant implications for the Japanese Yen which has suffered from the BoJ's dovish stance, especially as the Fed and other major CBs are looking to remove monetary restraint. The stock market has benefited and JPN225 reached new record highs recently, but could face pressure as the BoJ unravels years of monetary easing.

Despite the historic pivot though, USD/JPY and JPN225 reacted higher in the immediate aftermath of the decision. Markets had come to anticipate the shift and the Bank of Japan did not exactly turn hawkish and is unlikely to embark on an aggressive tightening cycle. Although it abandoned the YCC, it will keep buying JGBs with "broadly the same amount as before" and expects that accommodative conditions "will be maintained for the time being".