The Bank of Japan's announcement of an interest rate hike on Tuesday shocked the world. Investors took it for granted, but the sharp rise in the yen did not come as promised. As of press release, the US dollar has broken through the 150 mark against the yen, surging more than 0.8%, leaving many investors puzzled.

Bloomberg columnists Daniel Moss and Gearoid Reidy wrote an article commenting on the Bank of Japan's latest interest rate hike decision. Their interpretation may help answer this question. The main contents of the article are as follows.

The Bank of Japan's decision to abandon negative interest rates is symbolic. Deflation has plagued this country for an era and has now been eliminated. Workers in Japan are finally enjoying meaningful wage increases. Policy makers no longer need to defend themselves when explaining their country's economic prospects. After several false dawns, the country has climbed out of the predicament it was in after the collapse of the real estate industry 30 years ago. You might even think this marks the end of some kind of exceptionalism. Japan has also removed formal controls on long-term bond yields.

However, the extent to which these measures are inherently less worthy of celebration. Although the Bank of Japan raised the main interest rate to a positive range from -0.1% since 2016, this rate hike is insignificant by global central bank standards. When the Bank of Japan decided to cancel negative interest rates on Tuesday, it actually only applied to a small portion of actual loans, and was full of restrictions.

The Bank of Japan's interest rate hike is not the beginning of a circular rate hike like the one adopted by the Federal Reserve, the Bank of England, the Bank of Korea, and the Federal Reserve Bank of Australia and New Zealand. Although some comments by Kazuo Ueda and his lieutenants may be portrayed as hawkish, they are probably not happy with this description, and have reason to be displeased.

The Bank of Japan has been refraining from revealing signs that it will raise interest rates several times over the next few months. In fact, it confirmed this position in its latest statement, promising to “maintain a relaxed financial environment for the time being,” taking into account economic and price prospects. For them, as long as they can consolidate this transformation without causing turbulence, that would be enough of a victory. The Bank of Japan was forced to cut interest rates again due to interest rate hikes in 2000 and 2007, which caused major turmoil in global financial markets.

Kazuo Ueda, who was in charge of the Japan Monetary Authority for almost a year, voted against the millennial rate hike as a less experienced member of the Bank of Japan Committee. When the interest rate was raised next seven years later, he had already returned to academia, and that rate hike also triggered a global financial crisis. As can be seen, seizing the timing of interest rate hikes has never been this central bank's strength.

One characteristic of Tuesday's interest rate resolution is that there was no opposition from politicians, which made the job easier. But if interest rate hikes occur several times in a row, the relative calm will collapse: Japan is the most indebted country among the rich, must support an aging population while preparing for a sharp increase in defense spending.

As for abolishing yield curve control (YCC), this move is long overdue. Since 2022, the YCC policy has been gradually weakening. Although the end has been announced, the Bank of Japan has not given up its ability to guide the bond market. Debt purchases will continue, but nominal targets will no longer be set. In the future, please also observe whether there are any interventions to determine their actual goals.

The “totem” in Japan's unorthodox monetary stimulus may be coming to an end, but the policy will still be more relaxed than almost anywhere else. Nearly a year after Kazuo Ueda took office, he demolished Kuroda Haruhiko's ten-year tenure. It was Haruhiko Kuroda who reduced borrowing costs to a negative value in 2016, and he spared no effort to promote economic recovery. From the beginning, the Bank of Japan was concerned about the impact of negative interest rates on banks' profits.

If Kazuo Ueda had drawn up a list of tasks for his first year of office, then freeing Japan's banks from the shadow of his predecessor would be a top priority. In that sense, he did an excellent job. The effectiveness of negative interest rates will continue to be debated for many years, but in Japan, negative interest rates have long since lost any use they may have. Policies aimed at encouraging banks to provide more loans seem to encourage them to invest in riskier assets, such as US real estate investments that have caused losses to a major lender.

As the inflation rate approaches the Bank of Japan's target, and wage increases obtained by major trade unions exceed even the most optimistic forecasts, companies will slow down the rate of price increases, and the alarming phenomenon of prices at the cashier counter is gradually fading away. Short-term headlines look good for Ueda and Osamu. But discussions about interest rate hike cycles or interest rate “take-off” are outrageous. Although discussions about “normalization” abound this week, when the Bank of Japan first introduced a negative interest rate policy, it was not normal. Negative interest rates became mainstream in the decades that followed. However, Japan is often depicted as an exception.

There is no compelling reason for Japan to implement clearly more stringent policies. Its economy avoided a technical recession in the fourth quarter, but only narrowly escaped it. Neither households nor the government can afford the significant increase in borrowing costs.

So what is the purpose of this rate hike? After all, Japan's inflation has declined from last year's high, and the Bank of Japan has taken no action. Kazuo Ueda chose to take action during a period when the global economy is relatively mild. He may want to push interest rates a little higher, so that he has room to cut interest rates when the next economic slowdown hits, without being quickly forced back to negative interest rates. Any explanation other than that seems unrealistic.

Editor/Somer