Asia report: Markets mixed as BoJ hikes rates, abandons YCC

Asia-Pacific markets finished with a mixed performance on Tuesday, as investors reacted to a policy shift from the Bank of Japan, which raised interest rates for the first time in 17 years.

The central bank also abandoned yield curve control, making for a significant change to its approach to monetary policy.

“Despite positive cues from Wall Street overnight, Asian stock markets are predominantly lower on Tuesday as traders adopt a cautious stance after monetary policy announcements from the Reserve Bank of Australia and the Bank of Japan,” said TickMill market analyst Patrick Munnelly.

“Additionally, anticipation surrounds the US Fed's monetary policy announcement on Wednesday, with investors keen for insights into the outlook for interest rates.

“Although Asian markets closed mostly higher on Monday, ongoing uncertainty prevails in the current session.”

Munnelly noted that the Fed was widely expected to maintain interest rates following recent inflation readings, that tempered optimism regarding a rate cut in June.

“However, market attention will be directed towards the central bank's accompanying statements and economic projections, which hold the potential to significantly influence rate expectations.

“Looking ahead, the Bank of England and the Swiss National Bank are also scheduled to announce their monetary policy decisions later in the week, adding to the market's anticipation and volatility.”

Markets mixed as investors digest policy shift from BoJ

Japan's Nikkei 225 index was a notable performer, climbing 0.66% to close above the 40,000 mark at 40,003.60, a movement propelled by the Bank of Japan's decision to raise interest rates for the first time since 2007, setting them at 0% to 0.1% from the previous -0.1%.

The decision, which also included the abolition of its yield curve control policy, marked a significant pivot away from the negative interest rate policy.

Real estate stocks, including Sumitomo Realty & Development, Tokyo Tatemono, and Tokyu Fudosan, were among the top gainers.

In contrast, China's Shanghai Composite and Shenzhen Component indices experienced declines, dropping 0.72% and 0.58% to 3,062.76 and 9.968.69, respectively.

Notable losses were seen in Gansu Guofang Industry & Trade Group and Hefei Metalforming Intelligent Manufacturing.

Hong Kong's Hang Seng Index also faced a downturn, decreasing by 1.24% oto 16,529.48, with companies like Li Auto, WuXi AppTec, and WuXi Biologics experiencing significant sell-offs.

Similarly, South Korea's Kospi index fell by 1.1% to 2,656.17, affected by losses in major corporations such as Korea Electric Power and Kia Corporation.

Conversely, Australia's S&P/ASX 200 index rose by 0.36% to 7,703.20, with Nickel Industries and Bellevue Gold leading the gains, reflecting positive market sentiment.

New Zealand's S&P/NZX 50 index also enjoyed an uptick, increasing by 0.77% to 11,817.91, buoyed by advances in Scales Corporation and Meridian Energy.

Currency markets saw the dollar strengthen 0.93% against the yen to trade at JPY 150.53, while it gained 0.75% on the Aussie to AUD 1.5360, and advanced 0.68% against the Kiwi to change hands at NZD 1.6545.

In oil markets, Brent crude was last down 0.18% on ICE at $86.73 per barrel, while the NYMEX quote for West Texas Intermediate slipped 0.11% to $82.63.

Bank of Japan raises interest rates, abandons yield curve control

At the top of the agenda on Tuesday was the Bank of Japan’s decision to raise interest rates for the first time since 2007, moving away from the negative rate policy that had been in place since 2016.

The central bank adjusted its short-term interest rates to 0% to 0.1%, up from -0.1%.

Additionally, the BoJ revealed the termination of its yield curve control policy, a strategy aimed at influencing longer-term interest rates through the buying and selling of 10-year Japanese government bonds.

The policy change marked a significant departure from the bank's longstanding approach to monetary policy.

“It’s not often that equities rise after an interest rate hike, but that’s exactly what happened in Japan,” said AJ Bell investment director Russ Mould.

“The Bank of Japan’s monetary policy decision is hugely significant - Japan’s cost of borrowing has gone up for the first time in 17 years after its wish for inflation finally came true.

“Japan’s interest rate has been below zero since 2016 in an attempt to stimulate the economy, but it’s now been lifted to a 0% to 0.1% range.”

Mould noted that the Nikkei 225 was the best performing major market index globally over the last 12 months, up 45% and just beating the “ferocious tech-heavy” Nasdaq 100 in the US, which had advanced 44%.

“Investors have been attracted to Japan’s relatively cheap valuations, the prospect of more generous dividends and as an alternative way to get Asian exposure to China which has disappointed of late.

“The key question now is whether the rate hike represents a ceiling for the index for the time being.

“With other countries expected to cut rates, investors lucky enough to have made money from Japan over the past year might recycle some proceeds elsewhere.”

Meanwhile, Japan's finance minister Shunichi Suzuki highlighted substantial advancements in wage negotiations this year, with initial estimates indicating that major firms had agreed to wage increases averaging 5.28% - the most substantial rise in over three decades.

Suzuki, citing the developments as indicative of the economy's positive trajectory, assured that the government would continue to implement policies to sustain wage growth, according to Reuters.

Elsewhere, Chinese foreign minister Wang Yi expressed China's readiness to deepen trade ties with New Zealand, referencing the recently-upgraded free trade agreement between the two countries.

During discussions with his New Zealand counterpart Winston Peters, Wang emphasised the importance of initiating negotiations on the negative list for service trade promptly.

Reporting by Josh White for Sharecast.com.