A Hawkish Turn by the Bank of Japan? Determination to Normalize Policy

As the week ends, investors are focused on the BoJ's interest rate decision, which came as a bit of a surprise. Although interest rates weren't raised, the central bank's decision to begin a cycle of reducing holdings in ETFs and REITs, as well as the distribution of votes during today's decision, provided some hawkish nuances surrounding the Bank of Japan's stance..

The Bank of Japan's decision to keep interest rates at 0,50% was in line with market expectations, but it was the split vote within the Monetary Policy Council that set the hawkish tone for the entire event. Two members, Hajime Takata and Naoki Tamura, supported an increase to 0,75%, intensifying the discussion about tightening monetary policy in Japan. Additionally, the Bank announced the gradual sale of its ETFs and J-REITs at a level of approximately 620 billion yen per year, spreading the process of reducing exposure to risky assets over a hundred years.The market reacted in a risk-off fashion: the JP225 fell 1,90%, with downward pressure particularly visible on large technology companies, where the BOJ's stake is relatively high. It's worth emphasizing that this move by the BOJ, though cautious and time-sensitive, signals the bank's determination to normalize its policy.

Yen strengthens after the bank's decision

The initial reaction to the BOJ decision was decidedly pro-yen, with the JPY appreciating by over 0,5% against the dollar. The increased expectations for a rate hike at the next meeting on October 29-30 resulted in a jump in swap valuations to 53% (from yesterday's 32%), and USD/JPY quotes fell significantly immediately after the announcement. This strong currency reaction was fueled by both the hawkish vote share and the announcement of guidelines for the sell-off of ETFs and J-REITs. In this context, market sentiment has shifted towards the risk of a rate hike, and investors have begun to price in more aggressive actions by the BOJ in the coming months.Banks were identified as potential beneficiaries of the normalization process, which supported the financial sector against devalued technology stocks.

After the initial euphoria in the FX market, however, sentiment cooled following Chairman Kazuo Ueda's conference. Ueda stressed that despite the growing pressure for gradual tightening, the BOJ still sees a moderate recovery of the Japanese economy and no serious reductions in investment, wages or employment.Significant downside risks remain related to tariffs and uncertainty in the currency market, which means monetary policy remains flexible and dependent on further macroeconomic data. The declaration of ETF/J-REIT sales at a rate "over a century" has been confirmed, but its scale is not yet considered a destabilizing factor for the market. As a result of the conference, the yen curbed its earlier gains, and markets moderated their initial movements, awaiting further signals of possible policy adjustments after the October meeting.

Source: Mateusz Czyżkowski, XTB