• A pivotal moment in history. The Bank of Japan (BoJ) became the last central bank in the world to abandon the negative interest rate policy, alongside terminating its yield curve control measures. However, it maintained its bond-buying operations, provided no future guidance on further policy normalisation and pledged to maintain accomodative financial conditions.

• 7-2 majority vote on guideline for market operations
  
  − The short-term policy interest rate: transitionedtowards a more conventional approach by setting the overnight call rate in a range of 0.0 – 0.1%. ▪ To achieve this guideline, the BoJ will applyan interest rate of 0.1% to deposits held by financial institutions at the Bank.
  
  − The long-term interest rate: the BoJ, in an 8-1 majority vote, commits to buying Japanese government bonds as necessary to prevent a rapid increase in interest rates.

• Guidelines for asset purchases (unanimous vote)
  
  − Discontinuation of buying exchange-traded fundsand Japan real estate investment trusts.
  
  − Gradual reduction of purchases of commercial paper and corporate bonds, with a plan to cease purchases within approximately one year.

• The bank judged that the price stability target of 2.0% would be achieved in a sustainable and stable manner, supported by evidence of a virtuous cycle between wages and prices. A key factor contributing to this decision was the outcome of this year's shuntō negotiations, with the first round indicating a weighted average salary increment of 5.28%, the highest in more than three decades. On the growth front, while Japan's economy is likely to continue recovering moderately for the time being, there still exist extremely high uncertainties.

• The BoJ’s next move will depend on the impact of wage growth on consumers’ spending
  
  − Governor Ueda has reminded the market that "there is still some distance for inflation expectations to reach 2.0%,"emphasising the necessity to maintain accommodative monetary conditions. The final outcome of wage negotiations, expected in April, holds significant importance as it will encompass the remaining 70.0% of jobs in Japan. If strong wage growth extends to these SMEs and results in robust and sustainable spending behaviour, then further rate hikes are likely. We reckon that evidence of increased consumption levels in the coming months could prompt the BoJ to consider two additional hikes, possibly in 2H24. However, for now, the bank may opt to maintain the status quo and closely monitor the inflation trend.
  
  − USDJPY year-end forecast (132.02; 2023: 141.04): As it may take some time before the BoJ implements further rate hikes, the direction of the yen will primarily be influenced by Japan's inflation data and the US Fed policy outlook. While we anticipate that Japanese investors may begin to reduce their overseas debt holdings (e.g., US Treasuries) and repatriate funds to Japan, which could strengthen the yen, we have adjusted our end-2024 target slightly higher to 132.02/USD, compared to 125.11 previously. This adjustment accounts for the BoJ's policy uncertainty, which may deter significant movements in asset reallocation. However, it's important to note that the yen is still expected to appreciate by more than 13.0% from its current level, based on our anticipation of a 100- 125 basis points reduction in Fed funds rates starting from June 2024.

Source: Kenanga Research - 20 Mar 2024