The BOJ's quarter point rate hike to 0.5% came as no surprise considering the stronger than expected fourth quarter GDP results. Policymakers in Japan find themselves in a similar boat as the Fed in that the direction to take in terms of interest rates remains blurry. The decision to tighten did however come as a welcome development for currencies as it let out pressure on the yen which had been accumulating due to the widening divergence in rates with the US and Europe. The direction that the economy is taking remains unclear given the recent mixed bag of indicators suggesting on the one hand, with weak consumer spending and low prices, that the recovery is delicate and, on the other hand, with growing business confidence and stronger GDP figures a more sanguine environment. The combination of ongoing reforms, rising export demand particularly from neighbors, reassurance that the US economy is not about to collapse
and growing overall optimism by both consumers and businesses should help keep Japan afloat for the rest of the year. The current environment also pretty much guarantees that we will not be seeing any further tightening for some time to come. Japan is, after all, still recovering from its deflationary cycle. They are not completely out of the woods yet!
