In a decision that marked a historic pivot, the Bank of Japan (BOJ) last week raised its benchmark interest rate for the first time in seventeen years. This move officially brought an end to the world’s final negative interest rate policy and signaled a departure from other unconventional monetary easing measures, including its complex Yield Curve Control (YCC) program.
Despite this significant tightening step, the immediate reaction in the currency market was, for many, counter-intuitive. The Japanese Yen did not strengthen; instead, it saw a notable depreciation. Against the US dollar, the Yen weakened by approximately 1%, pushing the exchange rate back above the 150 Yen per dollar level. Similarly, the Yen softened against the Singapore dollar, resulting in the SGD/JPY rate climbing back above 112.
Specifically, by Tuesday, March 19th, Singapore time, the Yen had slipped by about 1.08% against the greenback, reaching 150.70 Yen per US dollar. The decline against the Singapore dollar was around 0.8%, bringing the rate to 112.18 Yen per SGD, while the Euro saw an appreciation of approximately 0.84% relative to the Yen, trading at 163.49 Yen per Euro.
The BOJ set its new policy rate target band between 0% and 0.1%. Alongside abolishing YCC, the central bank also discontinued other asset purchase programs like those for exchange-traded funds (ETFs) and Japanese Real Estate Investment Trusts (J-REITs). However, critically, the BOJ stated it would continue purchasing long-term Japanese government bonds (JGBs), albeit likely at a pace that could allow yields to move more freely compared to the YCC era. This signaled a commitment to maintaining relatively accommodative financial conditions for the time being.
Markets interpreted this nuanced approach – a hike combined with signals of continued support and a cautious outlook on future tightening – as less aggressive than some had anticipated. This led to a classic “buy the rumor, sell the fact” scenario for the Yen, as highlighted by Bart Wakabayashi of State Street. Initial market moves saw JGB yields actually fall (prices rise), and the USD/JPY rate rise (Yen weaken). Selena Ling, a strategist at OCBC Bank, noted this initial reaction and suggested it would likely be temporary, given the market had largely priced in the rate hike decision itself.
Other parts of the Japanese market reacted more positively. JGBs saw yields decline, likely on the back of the BOJ’s commitment to continued purchasing. The Topix equity index rose by 1.1%, reaching its highest level since 1990, perhaps viewing the end of negative rates as a step towards normalization without signaling immediate, aggressive future hikes that could stifle growth.
In essence, while the BOJ’s move is a monumental policy shift ending an era of extreme easing, the market’s focus quickly turned to the pace of future tightening and the central bank’s willingness to maintain supportive conditions. This initial cautious stance from the BOJ appears to have tempered the Yen’s reaction, preventing the significant appreciation that might otherwise have been expected after a rate increase of such historical significance. The path forward for the Yen and Japanese assets will heavily depend on global economic trends and the BOJ’s future communications regarding further steps towards policy normalization.
Riley Evans 
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