BOJ's Ueda charts bold course towards economic normalisation

Bank of Japan Governor Kazuo Ueda has fully taken on the mantle of leading the normalisation of Japan's economy by ratcheting up efforts to move the central bank away from unconventional policy measures to more orthodox policy settings. On Wednesday, Ueda and the BOJ board hiked interest rates for the second time this year and announced significant cuts in bond purchases, ending more than a decade of aggressive debt-buying.

The new interest rate of 0.25 per cent, while remaining very low by the standards of the rest of the world, is still Japan's highest borrowing cost since December 2008. Further rate increases, according to the BOJ, will depend on future inflation forecasts. It is a strategic move underlining Ueda's commitment to dismantling the world's most extensive central bank stimulus program, even in the face of potential risks.

"Today's BOJ meeting proved to be the blockbuster event that we have been forecasting," said Krishna Bhimavarapu, APAC economist at State Street Global Advisors. Bhimavarapu called the rate hike, reduction of bond-buying, and clearer policy direction key components of the BOJ's latest measures.

After initial gyrations in markets, Ueda's press briefing following the announcement only served to further confirm market expectations of sustained interest rate hikes. The subsequent meeting by the Federal Reserve also hinted at a probable cut in US rates by September, which added further support to the yen's momentum.

The dollar fell against the yen on Thursday, breaching 149 for the first time in over four months, while the Nikkei 225 stock index was also lower in morning trade.

Bhimavarapu expects rates in Japan to reach 1 per cent next year amid improving consumer spending and economic growth. "Either way, the BOJ has taken the big bold step towards normalisation," Bhimavarapu added.