This morning, in one of the last major economic calendar events of the 2023 year, the Bank of Japan concluded its 2023 December policy meeting, and released its latest interest rates decision.The BoJ decided to keep rates steady at -0.1 per cent. The country’s negative interest rate has been in place for some time – an anomaly in a very hawkish year where several countries have had rate hikes of more 100 basis points.The BoJ is also leaving the target for its 10-year yield curve control (YCC) also intact at 0 percent. This decision was reportedly unanimous – signifying a strong stance against any immediate surprise rate hikes in the short term.What was on everyone’s minds – communication as to when, if and how Japan would exit this negative interest rate cycle – remained absent. Guidance was left unchanged and, unlike the FOMC’s latest rates announcement, timelines and monetary policy plans for 2024 were noticeably absent. FX: Effects of the rates decision for JPYThe Bank of Japan’s stance, and lack of communication on any exit plans for its negative interest rate, did little to help the JPY in its current losing streak. The USD has rebounded significantly against the Yen, rising significantly from 142.60 to 143.75 in just a few short hours. Further clues from deputy BoJ governorHowever, deputy governor of the Bank of Japan Ryozo Himino gave a speech entitled on December 6th which sheds some light onto the matter:
Looking at financial institutions, their profit margins have continued to deteriorate during the phase of declining interest rates, with net interest income falling to less than half of its peak. It cannot be guaranteed that, during a phase of rising interest rates, the opposite would simply happen and profit margins would increase… However, this phase would also pave the way for financial institutions to raise their investment yields by replacing the bonds they hold with new ones. In addition, if the corporate sector makes active investments along with economic improvement during the exit phase, this will likely increase loan demand and make it easier for the financial institutions to secure profit margins between deposits and lending… Appropriate risk management will be needed to weather the stress in the transition phase, but, in our view, the financial system on the whole has the necessary resilience to withstand such stress.”
So, exiting the current phase by substantially raising interest rates in an ordered manner is certainly on the BoJ’s mind and – perhaps – even in its imminent 2024 plans. Kazuo Ueda maintains mysteryBank of Japan Governor Kazuo Ueda gave a press conference some hours after the rate decision announcement, at which analysts were hoping for further information shedding further light on the BoJ’s decision future plans for potentially exiting the negative interest rate. Ueda, however, remained cryptic and open-ended in his answers:
We still need to scrutinise whether a positive wage-inflation cycle will fall in place. The cost-driven inflation appears to be finally peaking… The prospects are gradually heightening. But in terms of whether the threshold would be met, we’d prefer to look at more data.”
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