Japan’s central bank on Tuesday finally

“The BOJ has taken a bit of a punt today on the expectation that the very substantial wage increases in a great number of firms is actually going to deliver household spending growth,” Rob Carnell, head of Asia Pacific research at ING, told CNBC Tuesday after the BOJ released its decision after its March policy meeting.

“At the moment, they don’t know that,” he cautioned.

The BOJ will now look to utilize its short-term interest rate as its primary policy tool. It will employ an interest rate of 0.1% to current account balances held by financial institutions at the central bank from March 21, while encouraging the uncollateralized overnight call rate (another interest rate used as a policy lever by the bank) to remain at around 0 to 0.1% — effectively raising interest rates from -0.1% previously.

Shortly after the BOJ announcement, Japan’s largest banks, including Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group, announced they would raise interest rates on ordinary yen deposits. 

There are some other highlights of its policy decision:

• It said it’d abolish its yield curve control, which it used to cap longer-term interest rates at around zero; and stop its purchases of exchange-traded funds and Japan real estate investment trusts.
• The BOJ also pledged to gradually slow its purchases of commercial paper and corporate bonds, with the aim of stopping this practice in about a year.
• It would resort to “nimble responses” in the form of increased Japan government bond purchases and fixed-rate purchases of JGBs, among other things, if there is a rapid rise in long-term interest rates.

CNBC takes a look at what could next happen:

The decision Tuesday sparked a sharp selloff in the Japanese yen, sinking to more than 150 yen to the dollar — a level that’s previously prompted intervention from Japanese authorities.

At his post-decision press conference, Ueda said a “rapid” pace of hikes is unlikely given the fragile economic outlook for the economy — a perspective that likely disappointed some Japanese yen bulls, according to Michael Brown, senior research strategist at forex broker Pepperstone.

In fact, the BOJ cautioned in its initial release it’s not about to embark on aggressive rate hikes, saying that it “anticipates that accommodative financial conditions will be maintained for the time being.”

At Tuesday’s press conference, Ueda did not commit to a timeline for a shrinkage of the BOJ’s balance sheet, nor did he give any clear signs on any further rate hikes.

The global rates team from the Bank of America — among those in the market who forecast the BOJ move following a litany of local Japanese news reports in the last week — said that they expect a “limited” immediate impact globally, as the action is already well priced.

The BofA team also noted that just because the BOJ scrapped its yield curve control framework that doesn’t mean it will lead to a sharp rise in yields on government bonds (JGBs). This is likely due to the BOJ saying it will continue purchasing government bonds worth “broadly the same amount” as before — currently about 6 trillion yen per month.

Barclays economists said that a decrease in the upper bound of offer sizes for JGBs suggested that the BOJ is looking to gradually reduce its purchases.

But with the BOJ unlikely to aggressively hike rates, there appears to be little chance of a sharp drop in the spread between U.S. Treasurys and JGBs that currently exceeds 300 basis points, Vishnu Varathan, Mizuho’s chief Asia ex-Japan economist, said.

“Whereas [an] unexpected dovish turn by the [U.S. Federal Reserve] is a different proposition altogether.”

The Fed is due to announce its own interest rate decision on Wednesday.

In the longer term, Hayden Briscoe, head of APAC multi asset portfolio management at UBS Asset Management, said that there will be a gradual step up in bond yields, “say, 25, 50 point blocks, [to] make sure the markets are functioning.”

Briscoe thinks that it will take some time for the BOJ to make more changes to the benchmark interest rate, pointing out that “they don’t want to scare people off with short rates going up aggressively, while the year long [yields are] under pressure.”

As such, what he thinks the central bank will do is to allow the longer end of the yield curve to start “nudging” higher slowly, then if the BOJ sees demand and prices going up due to higher wages, then the bank will “start nudging again on the cash rates.”

Briscoe does say though, that this move will not be coming any time soon.

“Whether the Bank of Japan decides to hike rates a smidgeon is not what matters at the March or April meetings. It will be the totality of the announced policy shift that we will focus on, along with what it does to expectations for more of the same,” Steven Major, HSBC’s global head of fixed income research, said in a note ahead of the BOJ’s historic move.

“Something big in Japan is about to happen,” he added.

— CNBC’s Shreyashi Sanyal contributed to this story.

Correction: This story has been updated with the correct name for inflation when the metric excludes food and energy prices.

Japan’s central bank on Tuesday finally

“The BOJ has taken a bit of a punt today on the expectation that the very substantial wage increases in a great number of firms is actually going to deliver household spending growth,” Rob Carnell, head of Asia Pacific research at ING, told CNBC Tuesday after the BOJ released its decision after its March policy meeting.

“At the moment, they don’t know that,” he cautioned.

The BOJ will now look to utilize its short-term interest rate as its primary policy tool. It will employ an interest rate of 0.1% to current account balances held by financial institutions at the central bank from March 21, while encouraging the uncollateralized overnight call rate (another interest rate used as a policy lever by the bank) to remain at around 0 to 0.1% — effectively raising interest rates from -0.1% previously.

Shortly after the BOJ announcement, Japan’s largest banks, including Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group, announced they would raise interest rates on ordinary yen deposits. 

There are some other highlights of its policy decision:

• It said it’d abolish its yield curve control, which it used to cap longer-term interest rates at around zero; and stop its purchases of exchange-traded funds and Japan real estate investment trusts.
• The BOJ also pledged to gradually slow its purchases of commercial paper and corporate bonds, with the aim of stopping this practice in about a year.
• It would resort to “nimble responses” in the form of increased Japan government bond purchases and fixed-rate purchases of JGBs, among other things, if there is a rapid rise in long-term interest rates.

CNBC takes a look at what could next happen:

The decision Tuesday sparked a sharp selloff in the Japanese yen, sinking to more than 150 yen to the dollar — a level that’s previously prompted intervention from Japanese authorities.

At his post-decision press conference, Ueda said a “rapid” pace of hikes is unlikely given the fragile economic outlook for the economy — a perspective that likely disappointed some Japanese yen bulls, according to Michael Brown, senior research strategist at forex broker Pepperstone.

In fact, the BOJ cautioned in its initial release it’s not about to embark on aggressive rate hikes, saying that it “anticipates that accommodative financial conditions will be maintained for the time being.”

At Tuesday’s press conference, Ueda did not commit to a timeline for a shrinkage of the BOJ’s balance sheet, nor did he give any clear signs on any further rate hikes.

The global rates team from the Bank of America — among those in the market who forecast the BOJ move following a litany of local Japanese news reports in the last week — said that they expect a “limited” immediate impact globally, as the action is already well priced.

The BofA team also noted that just because the BOJ scrapped its yield curve control framework that doesn’t mean it will lead to a sharp rise in yields on government bonds (JGBs). This is likely due to the BOJ saying it will continue purchasing government bonds worth “broadly the same amount” as before — currently about 6 trillion yen per month.

Barclays economists said that a decrease in the upper bound of offer sizes for JGBs suggested that the BOJ is looking to gradually reduce its purchases.

But with the BOJ unlikely to aggressively hike rates, there appears to be little chance of a sharp drop in the spread between U.S. Treasurys and JGBs that currently exceeds 300 basis points, Vishnu Varathan, Mizuho’s chief Asia ex-Japan economist, said.

“Whereas [an] unexpected dovish turn by the [U.S. Federal Reserve] is a different proposition altogether.”

The Fed is due to announce its own interest rate decision on Wednesday.

In the longer term, Hayden Briscoe, head of APAC multi asset portfolio management at UBS Asset Management, said that there will be a gradual step up in bond yields, “say, 25, 50 point blocks, [to] make sure the markets are functioning.”

Briscoe thinks that it will take some time for the BOJ to make more changes to the benchmark interest rate, pointing out that “they don’t want to scare people off with short rates going up aggressively, while the year long [yields are] under pressure.”

As such, what he thinks the central bank will do is to allow the longer end of the yield curve to start “nudging” higher slowly, then if the BOJ sees demand and prices going up due to higher wages, then the bank will “start nudging again on the cash rates.”

Briscoe does say though, that this move will not be coming any time soon.

“Whether the Bank of Japan decides to hike rates a smidgeon is not what matters at the March or April meetings. It will be the totality of the announced policy shift that we will focus on, along with what it does to expectations for more of the same,” Steven Major, HSBC’s global head of fixed income research, said in a note ahead of the BOJ’s historic move.

“Something big in Japan is about to happen,” he added.

— CNBC’s Shreyashi Sanyal contributed to this story.

Correction: This story has been updated with the correct name for inflation when the metric excludes food and energy prices.