The yen rallied against the dollar Wednesday after Bank of Japan hiked interest rates for the second time in 17 years, while equity markets climbed on growing hopes for a cut in US borrowing costs.
Crude prices surged on worries about an escalation in the Middle East after Hamas said its political leader was killed in an Israeli air strike in Iran.
After more than a decade of pursuing an ultra-loose monetary policy to kickstart the stuttering economy and flatlining inflation, the BoJ has this year shifted its focus as prices continue to rise at rates above the bank’s target.
That saw a lift in March to around zero to 0.1 percent — the first hike since 2007 — marking a shift away from a long-running campaign of negative rates.
Wednesday’s decision put them at 0.25 percent.
Bets on another BoJ increase had surged in recent days, pushing the yen to as low at 151 to the dollar at one point — its best since March — putting it on course for its best month in a year and a half.
“While historically the BoJ have been known to disappoint, this time the policy changes have met the mark and should be seen as a show of confidence and a message that they see economics in a strong enough position to absorb a lift in the cost of capital,” said Chris Weston at Pepperstone Group.
However, officials have had to tread a fine line as the economy remains fragile.
Many commentators had predicted the bank would stand pat this month, but Japan’s newly appointed top foreign exchange official said the benefits of a weaker yen were outweighed by the demerits.
“While the recent depreciation of the yen has both advantages and disadvantages, the demerits are becoming more noticeable,” Atsushi Mimura told Bloomberg in an interview Monday, pointing to higher energy and food prices as well as the effect on importers.
The yen’s advance comes just weeks after the unit hit a nearly four-decade low close to 162 at the start of July. Higher rates push up government yields, making assets more attractive to anyone looking for better returns.
Before the announcement Stefan Angrick at Moody’s Analytics warned that at best a small increase would be an added drag, and at worst “it would tip the economy into recession and precipitate broader financial market disruptions”.
However, Hiroshi Namioka at T&D Asset Management was less concerned, saying ahead of the announcement he thought BoJ boss Kazuo Ueda “wants to expand the scope for lowering policy rates for the future”.
He said the impact of an increase “on the real economy, such as consumption and capital investment, will be limited. In fact, unless the policy interest rate is raised, inflation may not slow down in the future due to a rise in import prices”.
The Nikkei 225 bounced back from morning losses after the announcement and finished more than one percent higher.
The rest of Asia also advanced, with optimism running high that while the Fed will not cut rates later in the day, it will tee up a reduction at its next gathering.
There is also talk of at least one more before the end of the year.
Hong Kong and Shanghai advanced, helped by hopes for more policy support following another weak batch of data on Chinese factory activity.
Sydney, Seoul, Singapore, Mumbai, Wellington, Bangkok, Manila and Jakarta also rose, while London, Frankfurt and Paris were also sharply higher.
Dealers brushed off news that Microsoft saw an increase in quarterly profit but its key cloud computing unit fell short.
That came after results last week from Tesla and Alphabet missed forecasts, fuelling concerns about the titan tech firms that have led a rally in markets this year.
More reports are due this week from fellow market heavyweights Apple, Amazon and Facebook-parent Meta.
Oil prices jumped after Hamas said its political leader, Ismail Haniyeh, was killed in an Israeli strike in Tehran, fanning fresh concerns about a wider conflict in the crude-rich Middle East.
A senior Hamas official warned that the killing was “a cowardly act and will not go unanswered”.
– Key figures around 0810 GMT –
Dollar/yen: DOWN at 151.05 yen from 153.09 yen on Tuesday
Tokyo – Nikkei 225: UP 1.5 percent at 39,101.82 (close)
Hong Kong – Hang Seng Index: UP 2.0 percent at 17,344.60 (close)
Shanghai – Composite: UP 2.1 percent at 2,983.75 (close)
London – FTSE 100: UP 1.2 percent at 8,375.72
Pound/dollar: UP at $1.2842 from $1.2832
Euro/dollar: UP at $1.0819 from $1.0813
Euro/pound: UP at 84.25 pence from 84.24 pence
West Texas Intermediate: UP 1.8 percent at $76.07 per barrel
Brent North Sea Crude: UP 1.6 percent at $79.86 per barrel
New York – Dow: UP 0.5 percent at 40,743.33 (close)
dan/mtp
