By Toma Mochizuki,
The Bank of Japan's decision to end its long-standing monetary easing policy could give added impetus to Japanese stocks as the bank's move sparks cautious optimism in the market that the country's economy is healthy and growing.
The bank's departure on Tuesday from its negative interest rate policy comes on the back of historically large wage hikes offered by major companies and the likelihood that stable, target inflation can be attained.
The decision could help push the 225-issue Nikkei Stock Average to new levels after it hit its record high in February and surpassed the 40,000 point threshold for the first time in early March, market analysts say.
"It's a world we have not yet experienced, but the market is likely to test higher levels as it confirms positive developments in the employment environment," said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management Co.
"40,000 now is a waypoint, and it would not be surprising to see the benchmark aim for 42,000 soon," he said.
The Nikkei ended Tuesday up 0.7 percent at 40,003.60, retaking the 40,000 level for the first time in about two weeks.
The BOJ said Tuesday short-term interest rates will be guided within a range of zero and 0.1 percent, judging that its goal of attaining stable 2 percent inflation is "in sight."
Under the ultra-easy policy, the BOJ had a minus 0.1 percent rate on a portion of deposits that commercial banks kept at the central bank.
Major firms this year have offered wage hikes of an average 5.28 percent after this year's negotiations with labor unions, marking the sharpest increase in more than 30 years and raising expectations that the Japanese economy has put chronic deflation behind it.
While the bank effectively raised interest rates for the first time in 17 years, BOJ Governor Kazuo Ueda said in a press conference Tuesday that further hikes would be dependent on how the economic and price situations develop.
His remarks were viewed as dovish and unsurprising, reiterating that the bank "is unlikely to tighten its policy any time soon," Ichikawa said.
The bank also decided to scrap its yield cap program, under which long-term interest rates have been at extremely low levels, and end its purchases of assets such as exchange-traded funds.
The conclusion of ETF purchases, which were used to provide support to financial markets as part of the bank's monetary easing, "is not expected to have much impact on the stock market as the system had not been utilized by the BOJ in some time," Ichikawa said.
Meanwhile, its major policy shift led the yen to depreciate against the U.S. dollar from the lower 149 range to as low as 150.49 in Tokyo and further weaken in New York and Oceania trading on expectations that the BOJ would maintain its accommodative stance while the interest rate gap between the United States and Japan would remain relatively wide.
The yen's outlook will largely depend on the U.S. Federal Reserve, with the "ball in the FOMC's court," said Kazuo Kamitani, a strategist at the investment content department of Nomura Securities Co., referring to the bank's two-day monetary policy meeting that ends Wednesday.
The U.S. central bank has raised interest rates over the past few years in a bid to tame historically high inflation, but the focus of financial markets has shifted to expectations of rate cuts later in the year.
While most do not expect interest rates to be lowered in the upcoming meeting, investors are focused on whether it is leaning toward two or three cuts in 2024, he said.
The yen's depreciation is a boon to the share prices of export-oriented companies as a weaker currency lifts overseas profits when repatriated.
But the larger and more long-term aspects necessary to push the stock market to new heights will be an "increase in corporate profits and an improvement in consumption," Kamitani said.
Think tanks expect continued profit growth among major Japanese firms in the business year ending March 31, but Japan's consumption has been lackluster with January data, the latest available on households of two or more people from the internal affairs ministry, dropping 6.3 percent on year for the 11th straight month of fall.
Related coverage:
Higher mortgages, stronger yen on horizon as BOJ ends negative rate
Japan PM Kishida describes BOJ's policy shift as "appropriate"
Appropriate interest rate levels to depend on economy: BOJ chief Kazuo Ueda
