RIP NIRP. BoJ Ditches the World’s Last Negative Policy Rate

Markets

RIP NIRP. The Bank of Japan ditched the world’s last negative policy rate this morning, raising it from -0.1% to a target range between 0% and 0.1%. The first hike since 2007 ended an 8-year experiment of sub-zero rates. It also scrapped the (soft) 1% cap on the 10-year yield and formally ended ETF and J-REIT purchases. The decisions followed last week’s Rengo wage negotiation outcome which offered the BoJ the final piece of the puzzle. The 5.28% pay raise was the biggest since 1991 and will establish a virtuous wage price spiral that brings inflation sustainably at 2% after decades of deflation. All of it sounds like a seismic monetary policy shock but it comes with a few nuances. The BoJ stresses that the still-accommodative policy stance won’t go anywhere anytime soon.

Indeed, the lack of guidance means today’s hike probably won’t be followed by rapid follow-through action. Policymakers including governor Ueda hinted at that long before this morning. It wasn’t a unanimous decision either (7-2). Second: the 1% soft cap on the 10-year yield was removed but the BoJ will still buy JGB’s with roughly the same amount as before (JPY 6tn per month) with the maturities higher than 5 and up to 10 years the focal point. In addition, the central bank said it can step in with “nimble responses” in case of a rapid rise in long-term yields. Lastly, the formal end to riskier ETF and J-REIT purchases is merely symbolical as the BoJ barely bought anything already since 2023. Japanese markets were clearly hoping for more. The yen nears the recent lows against the dollar (USD/JPY back above 150) and the euro (EUR/JPY 163.4). Japanese bond yields ease between 0.7 (2-y) and 2.7 bps (10-y).

The Reserve Bank of Australia also met this morning (see below). A dovish tweak suppresses the Aussie dollar compared to peers as well. The likes of the dollar and the euro generally trade strong with the former having a slight edge over the latter. EUR/USD lost some ground yesterday. The downleg coincided with a sharp uptick in oil prices to the highest level since November around $87/b amid supply cuts/worries and ebbing concerns about global as well as Chinese demand. The pair continues down the same path this morning, confirming a break below the 1.0875 support zone (38.2% retracement on 2023 Q4 rally). DXY is readying an assault of the 104 big figure. Core bonds hold Monday’s losses that pushed yields no more than 2 bps higher.

The BoJ and RBA were today’s key events. The economic calendar for the remainder of the day won’t inspire markets (ex. Japan) into any directional movement. That’s even more so given looming event risk, including coming from tomorrow’s Fed meeting. If anything, we expect a solid bottom below core bond yields and see a slight advance of the USD compared to peers.

News & Views

The Reserve Bank of Australia kept its policy rate unchanged at 4.35% this morning, but dropped forward guidance that a further increase in interest rates cannot be ruled out. They changed it by indicating that the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and that the Board doesn’t rule anything in or out. There are encouraging signs that inflation is moderating, but the economic outlook remains uncertain. The central forecasts are for inflation to return to the target range of 2%–3% in 2025, and to the midpoint in 2026. Household consumption growth remains particularly weak but real incomes are expected to rise and support consumption later in the year. Conditions in the labour market continue to ease gradually, although they remain tighter than is consistent with sustained full employment and inflation at target. AUD swap rates drop 5 to 8 bps this morning with the front end of the curve outperforming. The Aussie dollar slips from AUD/USD 0.6560 to 0.6520. First real support stands around 0.6450.

Bulgarian FM Vassilev says that he didn’t give up on January 1st to adopt the euro, but warned that the start-of-the-year target is very close. He said that a March or July date would also be possible. Eurogroup president Donohoe said it’s up to the government to request a further economic evaluation. Meeting the inflation test will be key. Apart from that, political turmoil is delaying efforts to carry out structural reforms.