Does a BoJ Rate Hike Matter?

• The Bank of Japan’s next rate decision is announced tomorrow.

• There’s increasing speculation that Japan’s policymakers may signal an end to their negative interest rate policy and may even drop the cap on government bond yields (Yield Curve Control).

• Although any changes would likely be small, the medium-term implications could have seismic repercussions if they encourage some of Japan’s overseas investments to return home.

BoJ: Leaders in Experimental Policy

Most investors are focused on the policy impacts resulting from the US Federal Reserve, the ECB, and the People’s Bank of China.

But:

• Ultra-loose monetary policy, however, was pioneered by Japan’s central bankers. Policy rates have been below 1% since the mid-1990s whilst the US and Europe only resorted to zero or negative rates in the last 15 years.

• Japanese interest rates have been held at -10 basis points (-0.1%) since 2016. Prior to that, they were +10 basis points from 2009.

• Japan has also already turned to yield curve control (YCC) to prevent longer-dated yields from spiraling higher in response to the funding needs of the government’s deficits. In the last couple of years, Japan maintained negative interest rates even while the US was increasing its own policy rate from 0.25% to 5.25% and domestic Japanese inflation levels were starting to march higher.

As a result of this static policy, the BoJ has been overlooked by many international investors. But this may be about to change.

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