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BOJ hikes rates with minimal impact amid volatility predictions

By Maja Garaca Djurdjevic
4 minute read

Japan has gone against the grain by hiking its interest rate for the first time in 17 years, with predictions of adverse impacts yet to materialise.

The Bank of Japan (BOJ) has initiated its first rate hike in 17 years following eight years of negative rates. While some predicted this move to have a market impact, things appear stable for now.

BOJ raised its key interest rate from -0.1 per cent to a range of 0 to 0.1 per cent, a move that coincided with an increase in wages following a rise in consumer prices.

Frederic Neumann, HSBC’s chief Asia economist, described the hike as the “end of an era for Japanese monetary policy” in a conversation with InvestorDaily.


“After battling deflation for decades, the Bank of Japan can finally relax and embark on gradual policy normalisation,” said Neumann.

“The return of inflation is partly explained by structural changes in the labour market, where worker shortages have begun to push up wages at a rapid clip. Although the working age population has declined already since the 1990s, increased participation by female and older age workers had staved off shortages until recently.

“With the female and older-age participation rates now reaching closer to their maximum, Japan is finally seeing real constraints on worker availability from its ageing demographic. The latest wage negotiations, in fact, saw increases at multi-decade highs.”

Despite the necessity of raising rates, Neumann cautioned that the Bank of Japan cannot tighten policy significantly further.

“The gains are built on a fragile foundation: productivity growth remains lacklustre, the shrinking population is constraining demand, and high debt levels render balance sheets much more sensitive to even marginal increases in interest rates.

“For now, therefore, it looks like the BOJ will be ‘stuck at zero’, unable to raise interest rates much further after having lifted them from negative to neutral this week.

“The BOJ will also be mindful not to tighten so much that the currency begins to climb, as a weak yen has been part and parcel of Japan’s reflation story, and should the exchange rate strengthen overly rapidly, this would undo a lot of the hard gains that Japan’s central bank has achieved in recent years.”

AMP’s Shane Oliver views the interest rate lift as non-alarming.

“I don’t think much will really change,” Oliver told InvestorDaily.

“The move was small, Japanese interest rates are still around zero and way below rates in other major countries and the BOJ indicated that monetary policy will remain easy for the time being – so it was a ‘dovish’ hike.”

As a result, he doesn’t expect Japan to suddenly repatriate funds and said the hike “is unlikely to change the appeal of the Japanese share market in the short term”.

“We are allowing for one more hike by year end taking the cash rate from a range of 0 to 0.1 per cent now to around 0.25 per cent by year end. So still very low,” Oliver said.

“The Japanese economy is barely growing and while inflation has moved above target, it’s mainly been due to energy and food. Strip them out and its only just above target suggesting the BOJ will be cautious in hiking.”

Ahead of the BOJ’s interest rate lift, however, Nigel Green, the chief executive officer of deVere Group, had warned that the move could cause volatility in Japanese stocks with investors predicted to recalibrate their portfolios in response to the policy shift.

Green moved on to say that adjustments in Japan’s monetary policy could trigger volatility in global equity markets.

“Sectors closely tied to Japan, such as automotive and consumer electronics, may experience stock price fluctuations influenced by currency movements and the performance of major Japanese corporations.

“The performance of leading Japanese companies like Toyota, Honda, Sony, and Panasonic heavily influences investor sentiment toward these sectors.”

However, this anticipated volatility has not materialised, as leading Japanese companies saw gains on Wednesday.