U.S. Dollar Falls as Bank of Japan Signals Possible End to Negative Interest Rates


The U.S. dollar took a plunge against the yen and Japanese government bond yields surged on Monday, following comments from Bank of Japan Governor Kazuo Ueda suggesting that the country’s long-standing negative interest rate policy may be coming to a close.

The dollar, which had reached a high of ¥147.90 on Friday, slumped 0.6% to ¥146.00. Simultaneously, the 10-year Japanese government bond yield climbed 5.2 basis points to 0.702%, reaching a level unseen since 2014. In response, U.S. Treasury bond yields also saw a slight increase, with the 10-year yield up 2 basis points to 4.284%.

According to reports, Governor Ueda conveyed in an interview with the Yomiuri newspaper over the weekend that by the end of 2023, the central bank should be able to determine whether its easy monetary policy that has spanned a decade can come to an end.

“When we are confident that Japan will experience sustainable inflation accompanied by wage growth, there are several options we can consider,” Ueda stated. “If we conclude that our inflation target can still be met without negative interest rates, we will move ahead accordingly.”

Bank of Japan policy board member Naoki Tamura expressed on Wednesday that the central bank’s goal of achieving a stable 2% inflation rate finally seems attainable. However, the country has been grappling with areas of stubbornly high inflation, although falling energy prices have alleviated some of the pressure on prices.

These remarks have influenced Deutsche Bank to revise its outlook on the Bank of Japan’s monetary policy. In a note issued on Monday, the bank informed clients that its economists now anticipate the removal of yield curve control in October, as opposed to the previous target of April 2024. Furthermore, they anticipate the end of the negative interest rate policy in January, instead of December 2024.

The BOJ’s Impact on Global Markets

In late July, the Bank of Japan (BOJ) made adjustments to its yield-curve control program, which loosened restrictions on the rise of 10-year Japanese government bonds. This move had a ripple effect, causing U.S. Treasury yields to increase and dampening the U.S. stock market rally. Despite these concerns, U.S. stock futures point to a positive start for Wall Street on Monday.

However, there are worries that if the BOJ tightens its ultra-loose monetary policy, Japanese investors may shift from holding U.S. Treasury bonds to Japanese government bonds (JGBs). This shift would result in an increase in U.S. and global yields since yields and debt prices move in opposite directions.

Benjamin Picton, senior macro strategist at Rabobank, raises a crucial question about the potential consequences of the BOJ tightening its policy. He highlights that the BOJ is the only major central bank still providing liquidity to global markets, and if it too begins to tighten its policy, it could have far-reaching effects on asset prices, yields, and financial stability.

The absence of China’s past rescues adds to the doubts of other central banks. As the last-standing shock absorber, the impact of the BOJ discontinuing its role is significant. Moreover, with China unlikely to intervene as it has done previously, central banks are left contemplating their next steps cautiously.

Despite having a remarkable performance this year, with a 24% increase thus far, the Nikkei 225 JP:NIK experienced a 0.4% dip on Monday. Currency-wise, the strength of the U.S. dollar is most evident against the yen, with a significant 11.5% rise this year.

Read: A rising U.S. dollar is ringing alarm bells overseas. Should stock-market investors worry?

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