Japanese shares erratic after BOJ’s landmark policy change

Singapore — Japanese shares were volatile on Tuesday, while the yen fell to near ¥150 to the dollar after the Bank of Japan (BOJ) in a widely expected move ended eight years of negative interest rates and ushered in the nation's first policy tightening since 2007.

In a week filled with central bank meetings across the globe, the BOJ heralded a new era as it shifted away from years of ultra-easy monetary policy.

The BOJ set the overnight call rate its new target and said it would guide it in a range of 0-0.1% by paying 0.1% interest on excess reserves financial institutions park with the central bank.

BOJ governor Kazuo Ueda is due to hold a press conference at 6.30am GMT to explain the decision, with traders looking for clues on the pace of further rate hikes.

“The BOJ took its first, tentative step towards policy normalisation. The big question is what happens next,” Frederic Neumann, chief Asia economist at HSBC.

“Likely, the BOJ will find that it is getting ‘stuck at zero’, being unable to lift short-term interest rates meaningfully further in the coming quarters.”

Japan’s Nikkei was choppy, moving between gains and losses, while the yen weakened 0.39% to ¥149.74 to the dollar, indicating the landmark pivot had already been priced into markets after weeks of policy clues and media reports that a shift was imminent.

Analysts anticipate the yen to be more influenced by the Federal Reserve’s policy decisions, including when and how much rate cuts are projected this year by the US central bank. In addition, the BOJ pledged to maintain accommodative policy and traders expect rates to remain at zero for some time.

“As the Fed begins to ease policy, the BOJ may need to proceed extra cautiously with any further tightening to prevent potential strength of the yen undermining hard-won gains in reflation,” said HSBC’s Neumann.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.62%. China stocks fell, with Hong Kong’s Hang Seng index down over 1%, while the blue chip shares eased 0.3%.

Central bank bonanza

Australia’s central bank held interest rates steady on Tuesday as expected, while watering down a tightening bias to just say that it was not ruling anything in or out on policy.

While financial markets have priced in rate cuts for most other major central banks starting around June, the Reserve Bank of Australia (RBA) is a notable outlier with no such midyear pricing.

The Australian dollar slipped 0.3% to $0.65375 following the decision. The Aussie is down 4% against the US dollar so far in 2024.

The Fed is widely expected to hold rates steady on Wednesday, with the market’s attention on policymakers’ updated economic and interest rate projections and comments from chair Jerome Powell.

Last week’s stronger than expected inflation reports led traders to reduce their bets on rate cuts this year, with markets now pricing in 71 basis points (bps) of easing this year. At the start of the year, traders were pricing in 150bps of cuts.

Traders are pricing in a 54.7% chance of the Fed starting its easing cycle in June, the CME FedWatch tool showed, sharply lower than earlier expectations.

“The Fed likely won’t tell us if a June cut is the baseline, but rather will continue to express confidence that multiple cuts are still expected for this year,” said Erik Weisman, chief economist and portfolio manager at MFS Investment Management.

Weisman said a lot will be riding on the next inflation report due next month, where “another strong print would likely call into question Fed cuts this year, while a lower figure will probably put a June cut firmly back on the table”.

The yield on benchmark 10-year treasury notes eased 1.4bps to 4.326% in Asian hours, having risen to a three-week high of 4.348% on Monday. The elevated yields boosted the dollar, with its index touching a two week high of 103.67.

In commodities, spot gold was last at $2,160.51/oz. US crude fell 0.16% to $82.59 a barrel and Brent was at $86.74, down 0.17% on the day.

Cocoa futures in New York and London gained more than 4% on Monday to reach record highs, buoyed by a supply shortage after poor crops in West Africa.

Reuters