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The BoJ has pulled off another mini masterstroke in its approach to changes in monetary policy, and again its ability to communicate important changes to the market, and not cause any tightening in financial conditions, shows that while they have an incredible challenge ahead of them, the BoJ are managing the situation admirably.
The 15bp hike to take rates to 0.25% was above the economist’s consensus, but then recent commentary in local press had this seen broad market positioning move closer to the 15bp hike outcome – and while historically the BoJ have been known to disappoint, this time the policy changes have met the mark and should be seen as a show of confidence and a message that they see economics in a strong enough position to absorb a lift in the cost of capital, and the reduced liquidity that comes from a ¥400b per quarter cut to BoJ bond buying.
As the BoJ has detailed, Japan’s real policy and real market rates are still negative, and until that dynamic changes we can say that policy is still accommodative and stimulatory, and with the current inflation dynamics in play, a move away from this setting is prudent and the market sees them in control and credible.
The reaction in JGB 10s speaks volumes, where yields have actually fallen 4bp since the announcement, while the 2yr JGB yield is unchanged and we’re seeing better buying again in the NKY225.
USDJPY is unchanged, and after a small bout of positioning-driven volatility, we see very calm conditions with the market almost moving on to offer its full attention towards today’s FOMC meeting.
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