(Reuters) - The Bank of Japan said on Wednesday it is raising its short-term interest rate to 0.25% and will gradually reduce the amount of bonds it is buying under its quantitative easing programme.
At the end of its two-day policy meeting, the central bank said the decision to raise its policy rate was unanimous and the amount of bonds it buys per month will fall to 3 trillion yen ($19.65 billion), half the current rough target, by early 2026.
Yields on government bonds fell slightly on the news, while the yen kept its early gains against the dollar.
QUOTES:
MATT SIMPSON, SENIOR MARKET ANALYST, CITY INDEX, BRISBANE
"Bots were quick to bid the yen on the surprise of a 15-basis-point hike, but gains were just as quick to evaporate on the hollow headline numbers.
"Yes, the BOJ hiked more aggressively than the 10bp expected, but they fell short on their 'detailed plan' of tapering.
"And in the grand scheme of things, the 15bp hike still takes their interest rate to 25bp. I suspect the yen will weaken heading into the FOMC meeting later today."
FRED NEUMANN, CHIEF ASIA ECONOMIST, HSBC, HONG KONG
"The BOJ took the plunge. Despite sluggish consumer spending, monetary officials sent a decisive signal by raising interest rates and allowing for more gradual balance sheet reduction. Despite sluggish consumer spending, rising wages are offering room for optimism that growth will recover in the coming quarters. Rising inflation expectations also open the path for ongoing monetary policy normalization by the BOJ. Barring major disruptions, the BOJ is on course to tighten further, with another interest hike by the start of next year."
MARCEL THIELIANT, HEAD OF ASIA-PACIFIC, CAPITAL ECONOMICS, SINGAPORE
"The bank sounded more confident that a virtuous cycle between prices and wages is underway as it noted that moves to raise wages have not only been observed at large firms but have been spreading across regions, industries and firm sizes. The bank argued that there's has been a strengthening of moves to reflect wage increases in selling prices. All this is consistent with our view that the bank will deliver another rate hike at its October meeting.
"However, in contrast to what financial markets are pricing in, we don't foresee any further hikes next year as underlying inflation will fall below the bank's 2% target due to falling import costs."
MIKI DEN, SENIOR JAPAN RATE STRATEGIST, SMBC NIKKO SECURITIES, TOKYO
"Compared with the scale of reduction in JGBs for maturities less than five years, the cuts in bond purchases for 5-10 years were smaller, which indicate the BOJ's willingness to contain the rise in the 10-year JGB yield. The yields on shorter maturities will tend to rise as a result of the new purchase plans, and that means the yield curve will flatten."
IZURU KATO, CHIEF ECONOMIST, TOTAN RESEARCH
"The decision to raise interest rates came likely to correct excessive monetary easing reflecting the real policy rate that slides deep into negative territory.
"Although the BOJ had explained all along that monetary policy was not targeting currencies, the weak yen must be a major factor behind today's decision given that it dealt a blow to SMEs in rural Japanese regions.
"You can say that the extent of the rate hike was rather small and symbolic. There's no need to fret about accelerating rate hikes, as the BOJ's rate hikes in March and July together reached an extent an ordinary central bank does in one go. It doesn't mean that the BOJ has turned hawkish all of sudden. Going forward, the BOJ will remain cautious against tightening policy too hastily."
VASU MENON, MANAGING DIRECTOR OF INVESTMENT STRATEGY, OCBC, SINGAPORE
"The BOJ's rate hike and reduction of its balance sheet was widely anticipated, and the yen has reacted with sharp gains against the dollar in the past three weeks already. Whether we will see further gains now depends on whether Governor Ueda adopts a hawkish tone and offers clear forward guidance at the press conference.
"It is hard to see Ueda going full-on hawkish given the recent mixed economic data from Japan. Much also hinges on what the U.S. Fed says and does after its policy meeting today. If the U.S. central bank takes a stronger dovish tilt it could cause some dollar weakness and consequently cause the yen to strengthen against the greenback."
MIN JOO KANG, SENIOR ECONOMIST FOR SOUTH KOREA AND JAPAN, ING, SEOUL "We think the Bank of Japan's rate hike today is because recent data has given the BOJ confidence that the economy is in a virtuous cycle between wage growth and consumption. Although the JPY has changed direction recently, the BOJ may have become more concerned that excessive JPY weakness could have a negative impact on the economy regarding to quarterly outlook, the downward revision of GDP for the current FY looks quite minimal from 0.8% to 0.6%.
TAKUMI TSUNODA, SENIOR ECONOMIST, SHINKIN CENTRAL BANK RESEARCH INSTITUTE, TOKYO
"A 0.25% rate only means lighter monetary easing (rather than tightening) and it's low relative to the current economic situations in Japan. BOJ may proceed with a further hike to 0.5%, probably in January or March. Japan's economy today seems to be in line with a 0.5% short-term rate or 1.5% long-term rate.
"You don't have to worry too much about excessive yen strengthening (due to BOJ's action). Rather, there could be a slight risk of discouraging consumer confidence by letting mortgage rates rise a bit, but overall, the benefit of the end of weak yen to smaller firms' earnings and workers' wages will outweigh the negative effects."
RYUTARO KIMURA, FIXED INCOME STRATEGIST, AXA INVESTMENT MANAGERS, TOKYO
"With the exclusion of super-long JGBs from the JGB purchases reduction plan for August-September, it seems that there will be a brake on the steepening of the yield curve. The BOJ is likely aware of the situation where the demand for super-long-term bonds from life insurance companies, aimed at complying with economic value-based solvency regulation, can no longer be expected.
"Given the long-term correlation between the BOJ's purchases of 5-10 year maturity JGBs and 25-year or longer maturity JGBs, and the 30-year to 10-year yield spread, it is likely that reductions in JGB purchases, particularly focused on long-term bonds, will help a flattening of the yield curve at the long end."
KIERAN WILLIAMS, HEAD OF ASIA FX, INTOUCH CAPITAL MARKETS, LONDON
"A mixed bag from the BoJ, almost something for everyone but appearing more hawkish at the margin. While the central bank cut JGB purchases by less than expected, they committed to a plan to continue the reductions going forward with a goal of halving purchases in the next 18 months, and left some wiggle room to alter the plan if needed.
"The real kicker was the surprise rate hike, expected by only a minority of forecasters and at 15bps in line with the most aggressive prediction. BoJ Governor Ueda also gave some hawkish concession when he said the bank would embark on more rate hikes if the economy continued to progress as forecasted, as opposed to guidance in March that said financial conditions would be maintained given the price outlook.
GARETH BERRY, FX AND RATES STRATEGIST, MACQUARIE GROUP, SINGAPORE
"The BOJ policy decision was in line with expectations, which had been revised after a media leak 12 hours beforehand. The policy rate was hiked by +15bp to 0.25%, and the policy statement signalled that further rate hikes are in the pipeline provided inflation plays out in the way the central bank expects.
"Quantitative tightening will take place in a predictable manner over the next two years - the pace of JGB purchases will be slowly reduced and allowed to fall below the pace of maturities among the BOJ's existing JGB holdings."
NORIHIRO YAMAGUCHI, SENIOR JAPAN ECONOMIST, OXFORD ECONOMICS, TOKYO
"I had thought that a rate hike was unlikely this time, given that the BOJ were to announce the plan for QE exit. Also, hard data for both income and consumption doesn't really show a positive cycle between wages and inflation yet. But today's decision revealed the bank's strong appetite for hiking rates while they can.
"On the JGB purchases, the reduction was within the consensus, so I believe it won't move the market a lot. After all it's a very gradual stepdown."
IROFUMI SUZUKI, CHIEF FX STRATEGIST, SMBC, TOKYO
"The latest developments show that the BOJ will gradually raise interest rates. Another rate hike is expected towards the end of this year or early next year. Monthly purchase pace of JGBs is in line of market expectations.
"In the short term, the yen is likely to appreciate, but over time, market participants will turn their attention to the FOMC and U.S. employment data."
CHARU CHANANA, HEAD OF CURRENCY STRATEGY, SAXO, SINGAPORE
"This must be one of BOJ's most hawkish moves given how low it has set the standard to be. The rate hike was well-telegraphed, but still a surprise that the BOJ delivered on it.
"However, bond-buying tapering appears much more modest than expected at 400 billion yen per quarter vs. expectations of 1 trillion yen per month (so, 3 trillion yen per quarter). This raises doubts on whether the central bank can achieve its target to reduce monthly JGB purchases to 3 trillion yen in two years.
"Pressure on the Japanese yen will likely continue if the Federal Reserve stays away from a clear indication of a September rate cut later today."
($1 = 152.6500 yen)