The Bank of Japan (BoJ) made significant changes to its monetary policy today, marking the end of its hostile interest rate policy (NIRP) by raising the rate from -0.1% to a target range of 0% to 0.1%. This move, the first rate hike since 2007, also saw the removal of the soft cap on the 10-year yield and the cessation of ETF and J-REIT purchases. These decisions were influenced by the recent outcome of Rengo wage negotiations, where a substantial pay raise of 5.28% was agreed upon, the largest since 1991. This wage increase is expected to trigger a positive wage-price spiral, ultimately leading to sustained inflation around the 2% mark after years of deflation.

However, the BoJ emphasized that its policy stance remains accommodative and hinted at a gradual approach to further changes. The decision to remove the yield cap was accompanied by assurances that the BoJ will continue to purchase Japanese government bonds steadily, particularly those with maturities between 5 and 10 years. Additionally, the central bank stated its readiness to intervene swiftly if long-term yields experience a rapid increase.

While the formal end to ETF and J-REIT purchases may seem significant, the BoJ’s actual purchases in these markets had already been minimal since 2023. Consequently, Japanese markets, which had hoped for more decisive action, responded with disappointment. The Japanese Yen weakened against both the US Dollar and the Euro, with the USD/JPY pair surpassing 150 and the EUR/JPY reaching 163.4. Japanese bond yields also eased following the BoJ’s announcement.

In other news, the Reserve Bank of Australia (RBA) kept its policy rate unchanged at 4.35% but altered its forward guidance, indicating uncertainty about the future path of interest rates. This adjustment, coupled with ongoing concerns about the economic outlook and subdued household consumption growth, led to a drop in AUD swap rates and a slight decline in the Australian Dollar against the US Dollar.

Meanwhile, Bulgarian Foreign Minister Vassilev discussed the country’s plans to adopt the Euro, stating that while the initial target of January 1st was not met, a date in March or July remains possible pending further economic evaluation and meeting inflation criteria. Political turmoil is cited as a factor delaying structural reforms in Bulgaria.

Overall, the BoJ’s policy shift and developments in the Australian and Bulgarian economies influenced market sentiment, with cautious optimism prevailing ahead of upcoming events such as the Federal Reserve meeting.

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