On December 19, the BOJ unanimously decided to raise interest rates by 25bp, bringing the policy rate to 0.75%—the highest level in 30 years since 1995.
However, the foreign exchange market moved in the opposite direction, with USD/JPY reaching the upper 157 range and EUR/JPY hitting an all-time high in the 184 range.
Two weeks ago in this column, I discussed “Will BOJ Rate Hikes Alone Be Enough to Stem the Yen’s Decline?” and made the following observations:
“What becomes important, then, is whether the BOJ succeeds in avoiding giving an impression of finality after the December meeting. Otherwise, there is ample possibility that the foreign exchange market will develop into a “buy the rumor, sell the fact” scenario.”
“The BOJ’s and Ueda’s communication skills with the market after the December meeting will thus be put to the test.
However, even with whatever communication the BOJ conducts, there ultimately remains the question of whether the market will actually revise upward its expectations for rate hikes.
This is because if the BOJ cannot convince markets that the Japanese economy is strong enough to withstand rate increases, the market’s conclusion may be that there is limited room for additional rate hikes.”
As it turned out, we must conclude that “buy the rumor, sell the fact” did indeed play out. The BOJ’s communication fell short of what the market had been expecting.
