Foreign Exchange Commentary

Summary

• Canadian dollar weakens marginally ahead of Bank of Canada minutes, Fed decision.
• The widely watched 10-year U.S. Treasury yield fell slightly to 4.28%.
• U.S. dollar climbs for fifth straight day; Japanese yen extends slump toward 2023 low.
• Japanese yen (JPY) falls to four-month low versus dollar before Fed decision.
• Gilts gain, U.K. pound sterling eases on slowing British CPI before Bank of England interest rate decision.
• Euro-Swiss franc on best run since 2008, faces SNB risk.
• Danish central bank sees 2024 GDP growth of 2.4%; previously saw 1.3%.
• AUD slide continues ahead of FOMC decision.
• Japanese yen falls to lowest level since 2008 versus euro currency as BoJ monetary path viewed as gradual.
• Mexico peso slides as all eyes focused on FOMC.
• USD/INR forward premiums slide as U.S. rate cut bets pushed back.
• Chilean peso sinks on dovish central bank outlook despite recent rise in copper prices.

Noteworthy

• Japanese Yen Weakens After Bank of Japan Raises Rates, Halts Emergency Policies

On Tuesday, the Bank of Japan ended negative interest rates after eight years and unwound most of its unorthodox monetary easing policies, saying a new era of stable inflation is in sight for Japan.

The decision marks the end of a global era of negative interest rates that began in the 2010s. Other central banks that had introduced negative interest rates in the 2010s, including the European Central Bank and the Swiss National Bank, have already moved back into positive territory amid inflation triggered by the Covid-19 pandemic and the war in Ukraine.

For a generation, the Japanese central bank served as a laboratory for monetary-policy experimentation as it addressed the country’s chronic stagnation, which was marked by flat or falling prices. 

On Tuesday, BoJ Gov. Kazuo Ueda said experimental policies have fulfilled their roles and the principal ones will be ended.  The Bank of Japan is moving its key target for short-term rates to a range of 0% to 0.1%, its first rate increase since 2007.

Ueda said the move was justified by steadily rising wages and prices in Japan. The central bank “judged that sustainable and stable achievement of our 2% inflation goal has come into sight,” he said.

The BoJ said it removed a target for the yield on 10-year Japanese government bonds. And it is halting its purchases of assets such as stocks, real-estate investment trusts and corporate bonds that don’t typically go onto the books of central banks. The Bank of Japan has amassed the equivalent of hundreds of billions of dollars in such assets since the global financial crisis of 2008-09. 

Market reaction was restrained because Bank of Japan officials had telegraphed their intentions. The Nikkei Stock Average closed up 0.7%, while the yen was down.

The Bank of Japan, which had maintained a negative interest rate policy rate since 2016, said it would continue buying government bonds.

“Accommodative financial conditions will likely continue, and these accommodative financial conditions will firmly support the economy and prices,” Ueda said at a news conference. He said he doesn't expect to raise interest rates rapidly.

Prime Minister Fumio Kishida welcomed the continuation of easy money, saying it was too soon to declare an end to deflation. 

The BoJ had already begun to ease away from its unconventional policies. In September 2016, it set a target of around zero for the yield on 10-year government bonds. After initially enforcing that target strictly, the bank last year loosened its control, allowing the yield to move higher amid a surge in global bond yields. As of late Tuesday, the 10-year yield was 0.725%.

The Bank of Japan’s move to restore traditional monetary policy tools is one example of how Japan’s economy has recently reverted to conditions not seen in more than three decades. 

In February, the Nikkei Stock Average hit a record for the first time in 34 years.  Japan’s largest labor union said last week that major companies are planning to raise pay by an average of 5.28% this year, the largest increase since 1991.

However, the Bank of Japan’s economic assessment pointed to some warning signs.  With China’s economy struggling recently, the BoJ said Japan’s economy “is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies.”

Two of the BoJ’s nine-member policy board dissented from the decision to end negative rates, saying the economy’s recovery was too fragile to allow for a rate increase. 

Katsutoshi Inadome, senior strategist at SuMi Trust, said the BoJ probably saw a window to act after the recent good news on wages. But he said there was a chance Tuesday’s rate increase was premature. 

“In a textbook approach, this is timing the bank would have done better to avoid,” Inadome said. He pointed to sluggish consumption in Japan, which Ueda acknowledged as a risk.  

Ueda said if the economy received shocks in the future, the central bank would consider using policy tools it has used previously.

“The Bank of Japan is unlikely to make additional rate increases because there will gradually appear more headwinds such as the lack of strength in prices,” said Mizuho Securities chief market economist Yasunari Ueno.