Bank of Japan Ends Eight-Year Era of Negative Rates

This morning the Bank of Japan raised interest rates for the first time since 2007 in a move which brought to an end an eight-year era of negative rates.

In a decision that was widely expected, the central bank’s target rate has now shifted to a 0% to 0.1% range. This followed a 7-2 majority in favour of hiking in which policy makers stated that “large-scale monetary easing measures have fulfilled their roles.”

The Central Bank also ended their yield curve controls on 10-year government bonds but indicated that they would continue with their policy of purchasing ¥6tn a month in government bonds.

The Bank of Japan’s decision comes as inflation showed signs of dropping from an annualised figure of 2.6% in December to 2.2% in January, marking the lowest print in almost two years. Nevertheless, with Japanese companies including – Honda, Nippon Steel and ANA Holdings – announcing what amounted to the largest wage rise in over thirty years, the prospect of inflationary pressures over the horizon persists. Given that real wages in Japan have been more or less stagnant since the end of the 1990s, the decision to increase pay above the current level of inflation is a considerable move with implications across the wider economy.

Attention now shifts to the Federal Reserve interest rate decision and Dot Plot publication tomorrow at 1800.

Yesterday, the head of the Bank for International Settlements, Agustin Carstens warned that states must ease up on their borrowing in order to avert a global debt crisis. Speaking at Goethe University in Frankfurt, Carstens indicated “The post-Global Financial Crisis low interest rate environment flattered fiscal accounts. Large deficits and high debt seemed sustainable, allowing fiscal authorities to avoid hard choices. But the days of ultra-low rates are over.” Carstens continued in maintaining that central banks must continue to keep interest rates elevated in order to bring inflation back down.

Carstens thus indicated that governments must adjust their spending strategies in light of tighter monetary conditions. Nevertheless, he also considered how ageing populations, climate change, deglobalisation and higher defence spending will continue to put fiscal demands on governments across many parts of the world.

The former treasurer of the Bank of Mexico and former secretary of finance under Felipe Calderón, highlighted the importance of governments – like Germany – having borrowing rules which helps bring confidence to lenders.

In the interest of context, the spread on the UK’s yen year government bond is presently 163bps versus the bund.

Yesterday saw China’s industrial production rise 7.0% on an annualised basis for the month of January, far surpassing market expectations of a 5% print. This represented the greatest level of expansion in just under two years and gave markets some grounds for cautious optimism on elements of the Chinese economy.

Given the hotter-than-expected industrial production print, commodity markets were buoyed on expectation of increased demand from the largest consumer of metals in the world. For example, yesterday saw Copper extend its rally to trade at 11-month highs.

Yesterday, data also showed Chinese retail sales surpassing expectations, hitting 5.5% against forecasts of 5.2%.

Notwithstanding the stronger-than-expected data, the Chinese economy continues to face headwinds, with a fragile property sector chief amongst these. While retail sales and industrial production showed signs of rebounding for example, other data also indicated that investment into real estate sunk 9% (on an annualised basis) over the first two months of the year.