(summary)⛩️Bank Of Japan raises interest rates, issues hawkish comments and slightly strengthens yen

The Bank of Japan is raising interest rates, which was in line with market and economist expectations. The market was pricing in an almost 100% chance of today's move. What's more, it was the largest hike in a dozen years (by 25 basis points), as the previous two were 20 and 15 basis points. Key statements from today's decision:

• Interest rate hike: The BoJ raised interest rates to 0.5% from 0.25%. 
• Reasons for the hike: The main reasons for the hike are: signals of rising wages, stable markets, and a desire to end the weakening of the yen (the yen is at all-time weakest in a dozen or more years depending on the benchmark)
• Further hikes: The BoJ signalled the possibility of further interest rate hikes, but stressed caution and concern for the stability of the economy. According to the BoJ, current rates are still low
• Inflation target: The BoJ reaffirmed that it will conduct monetary policy in a manner appropriate to achieving a sustainable and stable inflation target of 2%.
• Voice of dissent: One BoJ board member, Nakamura, opposed the rate hike, arguing that the decision to change guidance on money market operations should be made only after confirming an increase in corporate profitability.
• Maintaining accommodative monetary conditions: The BoJ stressed that even after the policy change, real interest rates will remain deeply negative and accommodative monetary conditions will be maintained.

Macroeconomic projections:

• Inflation (CPI):
  • Fiscal year 2024: +2.7% (up from +2.5% in October)
    Fiscal year 2025: +2.4% (up from +1.9% in October)
    Fiscal year 2026: +2.0% (up from +1.9% in October)
• GDP:
  • Fiscal year 2024: +0.5% (down from +0.6% in October)
    Fiscal year 2025: +1.1% (unchanged from October)
    Fiscal year 2026: +1.0% (unchanged from October)

Ueda's comments:

• STILL A LONG WAY TO REACHING NEUTRAL RATES
• I DON'T THINK BOJ IS BEHIND THE CURVE
• ON CPI 2025 FORECAST: UPWARD REVISION IS MOSTLY TOWARDS THE MIDDLE OF THE CALENDAR YEAR
• REAL INTEREST RATES REMAIN SIGNIFICANTLY NEGATIVE
• EASY MONETARY CONDITIONS WILL KEEP SUPPORTING THE ECONOMY AS REAL RATES REMAIN SIGNIFICANTLY NEGATIVE

Ueda announces further hikes, but their scale at this point need not be large at all, as the banker has admonished multilaterally about the beneficial effect of clearly negative rates on the economy. We assess the banker's statement neutrally, in a way that favors neither hawkish conclusions nor dovish ones.

The BoJ was expected to raise its expectations for this year's inflation to just 2.0%. However, the current change is significant and suggests that we may be facing mounting price pressures in Japan. It is worth mentioning that the bank's current balance sheet to GDP is the highest in the world, which could generate price pressures. Japan also holds an extreme amount of foreign assets, so the potential desire to return these funds to the country could lead to an exponential strengthening of the yen. 

At the moment, USDJPY is testing important support near the 155 level. It is worth remembering, of course, that the BoJ could make another pivot in a few months and conclude that Japan still needs lower interest rates and end the cycle. Nevertheless, if the 154-155 zone were to be broken, an approach under 152, where there is important support in the form of the 200-session average, cannot be ruled out.