The Japanese Yen will only benefit if the BoJ hints at further rate hikes – Commerzbank

The Japanese Yen (JPY) reacted negatively after the Bank of Japan (BoJ) announced the end of its negative rate policy. Commerzbank economists analyze the outlook for the Yen.

The Bank of Japan delivers and continues to disappoint

The BoJ raised interest rates for the first time since 2007. The official short-term interest rate is now between 0% and 0.1%. At the same time, the long-term target for JGBs (yield curve control (YCC)) was abandoned, although the BoJ still intends to buy a similar number of JGBs per month as before, just without a explicit objective. On the other hand, stop buying ETFs and REITs, and purchases of commercial paper and corporate bonds will gradually reduce until stopping completely in 12 months.

A symbolic exit from the negative interest rate policy is unlikely to boost the Yen much. After all, there have already been several exceptions to the negative interest rate policy, and the last rate hike was just a few basis points. Only if the BoJ hints at further rate hikes, which would indicate a true hiking cycle, would the Yen benefit more. Everything else is already discounted after the statements of recent weeks.

Although the BoJ took a first step away from its ultra-expansive monetary policy, it was not a clearly aggressive turn, but rather a moderate rise in rates. The key now is inflation. If there are new signs that inflation remains stagnant at the BoJ's 2% target, further measures could be taken to normalize monetary policy.

However, we remain skeptical that inflation will truly remain high. After all these years of extremely low inflation, We believe that it would have been better to wait a little longer for this wage-price spiral to sustainably anchor inflation at the 2% target. Following today's decision, there remains a risk that the BoJ will have to stop normalizing its monetary policy sooner rather than later.. This must be taken into account.