BoJ Hikes to 0.5%; To Maintain 'Gradualist' Strategy, Yen Falls

The Bank of Japan voted 8-1 earlier today to raise its target for short-term interest rates to 0.5%, from 0.25%. This is the first change in monetary policy since it hiked to 0.25% last July, after five years of supporting its zero interest rate policy. The BoJ noted improvements in two key areas: consumer spending, which it claims had suffered from seasonal weakness, and less concern about the strength of important overseas economies. The Nikkei 225 initially traded lower on the news, but rallied back, while the broader TOPIX added 0.25% to close at a 15 year high. Traders sold the yen following the BoJ's decision and officials' comments -- it is now just under ¥121/$1. BoJ Governor Toshihiko Fukui said forex was not behind today's rate hike, although he recognizes the carry trade could hurt the economy. The BoJ's benchmark rate of 0.5% is 4.75% lower than the Federal Reserve's 5.25%, still a sizable gap which will likely keep downward pressure on the yen.

Sources: Bank of Japan decision [.pdf], Bloomberg, MarketWatch
Commentary: Bank of Japan's Policies are the Problem, Not the Solution • Will the Yen Bears Be Surprised? • The Yen Gains Strength -- What Should We Expect?
Stocks/ETFs to watch: Mitsubishi UFJ Fin. Grp. (MTU), Mizuho Fin. Grp. (MFG). ETFs: iShares MSCI Japan Index (EWJ), iShares S&P/TOPIX 150 (ITF), BLDRS Asia 50 ADR Index (ADRA), CurrencyShares Japanese Yen Trust (FXY)

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