Bank of Japan Backs Away from Future Rate Hikes

Shortly after the Wednesday opening of Japanese stock markets, Bank of Japan (BOJ) Deputy Governor Shinichi Uchida attempted to quell fear about imploding yen carry trades.

What’s the scoop?

• Sudden Reversal: Although the BOJ just hiked its short-term interest rate target from 0.1% to 0.25% last week, the central bank has already capitulated on its hawkish policy stance following Japan’s worst stock market crash since 1987. Deputy Governor Uchida stated the BOJ will “maintain current levels of monetary easing for the time being” and that the market should discount the risks of overtightening.
• Mixed Reactions: Global risk markets strengthened overnight as fears of additional Japanese rate raises subsided, but sold off throughout today’s U.S. trading session as the implications of the BOJ’s stance were further digested.

Bankless Take:

While many traders initially perceived the BOJ’s promise of no further rate cuts as a bullish impulse, others have interpreted it as a signal of panic and are beginning to question the effectiveness of the central bank’s monetary policy. Despite the BOJ increasing its short-term interest rate target, yields on long-term Japanese government bonds slid throughout last week, with bonds tripping upside circuit breakers during the peak of the Monday selloff.

The difference between causation and correlation is difficult to parse as it relates to the strengthening yen; it remains unclear whether carry trades imploding is a direct result of Japanese interest rate policies, or a concerning side effect of carry trade participants simply unwinding their positions and squeezing late movers in the process.