TOKYO – The Bank of Japan made a surprise decision to let a benchmark interest rate rise from 0.25% to 0.5%, pushing the yen higher and ending a long stint in which it was the only major central bank to hold the Interest rates not increased.
The BOJ said the yield on the 10-year Japanese government bond could rise as high as 0.5% from a previous 0.25% cap. The central bank has set a target range around zero for benchmark government bond yields since 2016 and used this as a tool to keep overall market interest rates low.
The 10-year yield, which had been stuck at 0.25% for months because of the central bank ceiling, quickly rose to 0.46% in afternoon trade.
The yen rose in tandem. A dollar was trading between 133 and 134 yen in Tokyo Tuesday afternoon, compared with more than 137 yen before the BOJ’s decision.
The Nikkei stock average, which was up slightly in the morning, fell more than 2% as investors digested the possibility that companies would have to pay higher interest rates on their debt. Also, the weak yen has boosted profits for many exporters, so a stronger yen could be negative for equities.
Governor Haruhiko Kuroda, who is nearing the end of his 10-year term, is known for surprising the market, although he has done less of it in recent years.
Market participants had anticipated that the Bank of Japan’s low interest rate policy might be running out of time, but generally did not expect Mr Kuroda to react at the final monetary policy meeting of the year.
The Bank of Japan’s statement on Tuesday’s decision failed to mention inflation as a reason to let government bond yields rise as high as 0.5%. Instead, she cited the deteriorating functioning of the government bond market and discrepancies between the yield on 10-year government bonds and those on other maturities.
The bank said Tuesday’s move would “facilitate the transmission of monetary easing effects,” suggesting it did not want the decision to be interpreted as monetary tightening.
The move is “a small step towards an exit” from monetary easing, said Mitsubishi UFJ Morgan Stanley Securities strategist Naomi Muguruma.
Ms Muguruma said the BOJ must narrow the gap between its 10-year yield cap and where the yield is when market forces are given full rein.
“Otherwise, magma could accumulate for higher yields, which would cause the yield to spike sharply when the BOJ actually subsides,” she said.
Japan’s interest rates are still low compared to the US and Europe, largely because inflation has not risen as quickly. The Federal Reserve last week raised interest rates to a range between 4.25% and 4.5% – a 15-year high – while the European Central Bank said it would raise interest rates to 2% from 1.5%.
In the US, inflation has slowed down recently but is still above 7%. In Japan, consumer prices in October were 3.7% higher than a year earlier.
Japan, like other countries, saw prices rise due to the impact of the war in Ukraine and the weakness of the yen. However, the pace of inflation is slower in Japan, where consumers tend to be very price sensitive.
Write to Megumi Fujikawa at [email protected]
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