World shares dip, yen slides amid landmark BOJ policy shift
Business
World shares dip, yen slides amid landmark BOJ policy shift
NEW YORK/LONDON (Reuters) - Global shares dipped and the yen slid on Tuesday after the Bank of Japan met market expectations by ending eight years of negative interest rates, likely the highlight of a busy week for central banks.
Investors will now turn their focus to the U.S. Federal Reserve's monetary policy meeting that ends on Wednesday, when the central bank is expected to provide further clues about the pace at which it will likely lower interest rates this year.
Financial markets are now considering the chance that the Fed might reduce the number of projected rate cuts this year to two from three on the back of last week's stronger-than-expected inflation data.
"We don’t think the Fed will fundamentally change its outlook for inflation based on two hotter than desired prints to start the year," said Christopher Hodge, chief economist at Natxis CIB Americas.
"However, we do expect a slightly more hawkish tone in the hopes of keeping a leash on financial conditions."
The day's big news was in Japan, where the BOJ heralded a new era as it shifted away from years of ultra-easy monetary policy. It also abandoned bond yield curve control and dropped purchases of riskier assets, including exchange-traded funds.
Japan's Nikkei (.N225), opens new tab was choppy after the decision but closed 0.66% higher, buoyed by the weaker yen, while Japanese government bond yields fell. The dollar rose 0.95% to 150.7 yen against the Japanese yen.
"The BOJ clearly has been very, very keen to manage this process so that it is not disruptive,” said David Mitchinson, fund manager at Japan focused Zennor Asset Management. “The markets have front-run them and anticipated their move.”
Though the shift was Japan's first interest rate hike in 17 years, it still keeps its rates stuck around zero as a fragile economic recovery forces the central bank to go slow on further rises in borrowing costs, analysts say, giving the rate-sensitive yen little traction.
In a statement announcing its decision, the BOJ said it would keep buying "broadly the same amount" of government bonds as before.
"So some of that spread closure between Japan and the U.S. isn’t quite really happening at the moment because although Japan has hiked a little, the U.S. hasn’t cut,” said Mitchinson, pointing to the fact that U.S. inflation pressures have been stronger than expected
BOJ Governor Kazuo Ueda said in his press conference that accommodative financial conditions would be maintained for the time being and the pace of further hikes would depend on the economic and inflation outlooks.
