The USD/JPY jumped by 0.7% after the Bank of Japan raised the interest rate for the first time since 2007 (to 0% from -0.1%), which marked an historic shift from a decades-long fight against deflation.
The central bank has announced that it is ending its policy of negative interest rates and controlling the bond yield curve (YCC), as well as stopping purchases of risky assets, including exchange-traded funds (ETFs). This decision was widely expected, and that resulted in a 'sell-the-fact' trade in Japanese markets. Meanwhile, experts warned that the yen will continue to decline as it remains a funding currency and is likely to keep being utilized for carry trades
"At today's meeting, policymakers assessed the beneficial cycle between wages and prices and concluded that the inflation target (2%) would be achieved in a sustainable and stable manner. The Bank will conduct monetary policy as necessary, using the short-term interest rate as the main policy instrument. Given the current outlook for economic activity and prices, the Bank expects favorable financial conditions to persist for some time," the Bank of Japan said.
The tightening of the Bank of Japan's monetary policy was partly facilitated by the largest wage increase in 33 years at annual negotiations with trade unions. Meanwhile, Finance Minister Shunichi Suzuki said on Friday that Japan had overcome decades of deflation.