This Is an Epochal Shift
Japan is ready for change.
The market’s attention only now will be focused entirely on the US central bank and the Federal Open Market Committee’s policy statement on Wednesday.That’s because the Bank of Japan announced its first interest rate hike since February 2007.
According to the Nikkei, the BoJ “sees a chance to normalize its monetary policy now that inflation appears set to remain at 2 percent or higher” following substantial wage increases agreed to by big corporations and labor unions this year.
The BoJ was the last central bank to have in place a negative policy interest rate. BoJ Governor Kazuo Ueda had said wage negotiations were a "key consideration" in the central bank’s policy deliberations.
Negotiations with big corporations resulted in wage increases averaging 5.28 percent, the highest level in 33 years. Raises for employees of smaller companies averaged 4.42 percent.
A BoJ source told Nikkei that the recent wage hikes “are of a level that even reflationists who are cautious about modifying monetary policy would accept a change in policy." The BoJ also ended its yield curve control program and new purchases of exchange-traded funds and real estate investment trusts.
February 2007 predates the Global Financial Crisis, the Great Recession, and the birth of our Jack-Chi, Bowie, who’s still rocking as he approaches 16.
It was a long time ago!
BoJ officials say policy will remain accommodative even after a hike. But even this subtle divergence from the forecast direction of US monetary policy, for example, will impact global fund flows.
The Japanese yen, anchored by negative interest rate policy, yield curve control, and a 1 percent cap on the yield on the 10-year Japanese government bond, has been a lucrative foundation for carry-trade activity in the forex market.
The bigger picture is that Japan’s economy seems to be emerging from a long-term rut.
Rising wages should filter through the service economy and provide a lift for restaurants and retailers. A recovery in global manufacturing is boosting Japan’s export industries, and a semiconductor rebound has similar knock-on effects for servers and data centers.
The Nikkei 225 is one of the best-performing equity indexes in the world so far this year, rising 18.75 percent after adding another 2.67 percent on Monday.
Futures were indicating a lower open for Japanese equities on Tuesday.
But this still seems like the net-positive kind of epochal shift.
