Japan: Strong Wage Growth Ends An Era Of Negative Interest Rates And Explicit Yield Curve Control
SovereignsSummary
In a much awaited move, the Bank of Japan (BoJ) took some important but largely symbolic steps in normalizing monetary policy by ending its Negative Interest Rate Policy (NIRP) and Yield Curve Control (YCC). Following the strong Shunto wage negotiation data released late last week, the BoJ stated today that on the back of a virtuous cycle between wages and prices, its 2% inflation target would likely be met in a sustainable manner. The BoJ will effectively revert to using short-term interest rates as a primary tool for monetary policy. Nonetheless, given the BoJ’s commitment to continuing Japanese Government Bond (JGB) purchases and sensitivity to long-term interest rate volatility, we see limited impact on the economy and markets for now.
Key Highlights
-- The BOJ ended its NIRP and YCC and raised rates to 0.0-0.1% from -0.1%-0.0%.
-- In line with the BoJ's policy statement, strong wage growth is likely to help the BoJ achieve its 2% inflation target.
-- The continuation of JGB purchases will likely limit the rise in long-term yields.
“The BOJ's actions are important steps in normalizing monetary policy, but point to a continued highly accommodative stance for some time to come” said Rohini Malkani, Senior Vice President Global Sovereign Ratings, “In the near term, the BoJ’s commitment to JGB purchases are likely to prevent any sharp moves in long-term yields.”