Yen Slides 0.9% in Spite of First Bank of Japan Interest Rate Hike Since February 2007
March 19, 2024
The Bank of Japan‘s ended “yield curve control”, a negative short-term interest rate target, and asset purchases other than government bonds and restored the primacy of its overnight rate — now 0-0.1% — as its primary policy tool. These changes were justified by the greater-than-expected 5% wage increases that came out of this year’s spring labor negotiations. The goal of core inflation somewhat above 2.0% had been already established for some time, but officials had resisted changing the policy stance until a sign of a developing and sustaining virtuous wage-price cycle emerged. Two press statements were released after the BOJ Board’s five-hour 50-minute meeting over two days: a summary of its discussion, including vote results and the latest macroeconomic expectations and a concise listing of the changes now being made in the central bank’s monetary framework.
An inflection point in the Bank of Japan’s policy stance had been so widely telegraphed and anticipated ahead of this month’s meeting, however, that immediate market responses to the news proved counter-intuitive. The market impact was also compromised by dissenting votes against ending the previous negative overnight rate, which had been -0.1% since January 2016 and Governor Ueda’s emphasis that future moves away from the ultra-expansive policy would proceed “at a slow pace” because of great uncertainty surrounding the forecasts.
- The yen fell 0.9% against the dollar overnight, again the dollar.
- The 10-year Japanese Government bond yield closed three basis points lower.
- The Nikkei-225 index closed higher, climbing back above 40k, but gained less than 1.0%.
- Other Pacific Rim stock markets weakened, with losses of 1.2% in Hong Kong, 1.1% in South Korea, 1.0% in India, and 0.7% in China.
More generally this Tuesday, the dollar’s weighted DXY index strengthened 0.5% to its highest level so far in March. The greenback rose 0.5% versus the loonie, 0.3% relative to sterling, and 0.2% against the euro. On this first of a 2-day highly anticipated FOMC meeting at the Fed, the 10-year U.S. Treasury yield has slid a basis point, and major European comparable sovereign debt yields have fallen 2-4 basis points. Continental European equities have firmed a bit, but the British FTSE is a little softer. The price of Bitcoin continues to cough up gains in chunks, slumping 6.4% so far today and by 13.5% since a record high touched last week. Gold and oil are 0.3% and 0.1% lower.
The anticipation of an initial European Central Bank rate cut continues to swell. It’s known that officials there have at least broached the subject of an exit strategy, and several Governing Council members including VP De Guindos have hinted a move could happen as soon as June. Regarding the Fed, the hope is that Chairman Powell’s press conference tomorrow will give some clues to how much the recent spate of higher-than-expected U.S. inflation data may have delayed the U.S. rate-cutting timetable.
There was a monetary policy review today also at the Reserve Bank of Australia, where the Official Cash Rate was again left at 4.35%, its level since a 25-basis point high last October. There were four previous hikes of that magnitude in 2023 on top of 300 basis points of increase undertaken during 2022. From November 2020 until May 2021, the OCR had been at 0.10%. RBA Governor Bullock’s statement after today’s review identifies elevated service sector price inflation as a continuing problem and projects overall Australian inflation not reentering the 2-3% medium-term target range until next year and not settling down to the target mid-point until 2026. Labor market conditions are easing, but the overall economic outlook remains uncertain. Hence, “the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain, and the Board is not ruling anything in or out.”
The Swiss government published updated growth and inflation forecasts. GDP in that economy is projected to rise 1.1% this year and 1.7% in 2025. The CPI forecast for this year was revised 0.4 percentage points lower to 1.5% and is seen receding further to 1.1% in 2025.
Labor costs in the euro area climbed 3.4% between the final quarters of 2022 and 2023, down from a 5.2% on-year increase in 3Q 2023 and 5.4% in 4Q 2022. Investor sentiment toward the euro area economy over the coming half-year period according to the ZEW expectations index improved 8.5 index points in March to a 25-month high of 33.5, having been as low as -12.2 last July. The mood continues to be lifted by falling price expectations, which registered a deeply negative reading in March of minus 64.3.
Germany’s ZEW expectations index printed at 31.7 this month, also its best score in 25 months. But perceived current conditions in both Germany and Euroland remained sharply negative at -80.5 and -54.8, respectively.
The sharp drop in Japanese industrial production during January was trimmed from -7.5% reported initially to a revised decrease of 6.7%, which was associated with a 1.5% year-on-year drop and similar to the average decline last year of 1.3%. Capacity usage caved 7.9% in January and was 4.4% below its level a year earlier.
Canadian consumer prices went up 0.3% in February, most in six months, but year-on-year CPI inflation there slowed to an 8-month low and was also below analyst expectations. In addition, all the measures of core Canadian inflation in February were also below market expectations and January results.
U.S. housing starts rebounded 10.7% on month in February following January’s 12.3% plunge and were 2.8% higher than in February 2023.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Japan, Euroland labor costs and ZEW expectations index, Japanese industrial production, Reserve Bank of Australia
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