On March 19th, the Bank of Japan announced a 10 basis point increase in short-term interest rates to 0%, marking the first rate hike by the Bank of Japan since 2007. This means that Japan has bid farewell to the eight year long period of interest rate hikes and has become the last major economy in the world to abandon its interest rate hikes strategy.
At the same time as announcing the interest rate hike, the Bank of Japan also announced the “Yield Curve Mastery” (YCC) strategy, running to purchase Japanese stock trading funds (ETFs) and real estate investment trusts. However, the Bank of Japan will continue to purchase treasury bond at roughly the same amount as before, initiating to purchase four times of JPY400-550 billion of 5-10 year treasury bond in April.
The Bank of Japan’s interest rate hike basically met the expectations of shopping malls. Around 12:00 Beijing time, the Nikkei 225 index fell 0.2% to 39682.15; The US dollar was at 149.87 against the Japanese yen, roughly unchanged from the previous day’s closing price.
Rengo, the largest labor union in Japan, announced last Friday that it has reached an agreement with management to artificially decline by 5.3% for the year, an increase of 1.5 percentage points from the previous year and the largest salary increase in 30 years. The Nihon Keizai Shimbun and other media cited journalists on Monday to say that the Bank of Japan immediately ran the internal and external harmony on the closing interest rate strategy after learning the above news. Prior to this, the Bank of Japan had exaggerated that a decrease in artificial growth rate was an important prerequisite for inflation to continue to return to 2%. If it can be confirmed that artificial and inflation can achieve a virtuous cycle, it will consider changing its easing strategy, including interest rate hikes.
Bank of Japan Governor Kazuo Ueda stated at a press conference on the afternoon of the 19th that further rate hikes will depend on the growth of the economy and price situation, but in the current situation, the possibility of a significant rate hike is not significant. He stated that over a time span of 5 to 10 years, Japan’s expected inflation level ranges from 1% to 1.5%.
Analysts at Capital Economics believe that the Bank of Japan will not further increase its strategic interest rates. After the Bank of Japan announced its interest rate decision, they wrote that the artificial growth of small companies will not be as strong as that of large companies. As artificial growth peaks, inflation will fall below the Bank of Japan’s target by the end of this year. Therefore, the Bank of Japan does not need to further increase interest rates.
At the beginning of 1990, Japan’s real estate foam was disillusioned, the stock market suffered a major attack, the unemployment rate fell, and the whole society fell into the low desire of deflation. After joining the 21st century, the Japanese authorities implemented a series of comfort strategies, only floating the strategic interest rate in 2000, 2006, and 2007.
From 2001 to 2006, the Bank of Japan purchased a large number of government bonds and long-term bonds at extremely low interest rates, injecting liquidity into the banking system. In 2012, after Shinzo Abe was re elected to Zaihei, he attempted to use an ultra loose monetary strategy, a loose financial strategy, and structural reforms to boost economic growth to rescue the sluggish Japanese economy.
In 2016, the Bank of Japan announced a reduction in the interest rate for trade bank excess reserve loans from 0.1% to -0.1%, marking the beginning of a period of interest rate hikes in Japan. However, it should be pointed out that the interest rate is only applicable to the Bank of Japan’s mobile account, not to personal loan accounts.
The yield curve control (YCC) strategy is also an unconventional currency strategy launched by the Bank of Japan in 2016, which aims to comfort economic growth and reduce inflation by setting the purpose of specific treasury bond bond yield, especially by keeping the yield pillar of 10-year treasury bond close to zero.
Abe’s “three arrows” have had limited effects in boosting the Japanese economy, but have led to unprecedented monetary easing in Japan, with one effect being a significant depreciation of the yen against the US dollar. At present, the exchange rate between the US dollar and the Japanese yen is around 150, with an increase of 72% compared to the end of 2012.
In 2022, due to the popularity of the COVID-19 and the domestic geopolitical tensions facing the supply side, the prices of kerosene and other commodities will rise significantly. The major central banks of Globegroup have curbed the soaring inflation and adopted a large-scale interest rate increase, with the rate and extent being the highest in at least 20 years. According to the statistics of clearing banks in China, in 2022, 38 central banks around the world added interest rates a total of 210 times, of which the Federal Reserve added interest rates 7 times, with a cumulative increase of 425 basis points. During this process, the Bank of Japan continued to maintain short-term interest rates at -0.1%, but relaxed the change in long-term interest rates from around ± 0.25% to around ± 0.50%. At that time, Bank of Japan Governor Tohiko Kuroda believed that the temporary phenomenon of price decline was due to factors such as raw material price drops, and in reality, the inflation goal had not been realized.
The main reason why the Bank of Japan has made up its mind to implement its interest rate strategy this time is due to the country’s inflation control goal of continuously increasing by 2%. The latest data shows that in January, Japan’s Consumer Price Index (CPI) fell by 2.2% year-on-year, slowing down for three consecutive months but exceeding the Bank of Japan’s inflation target of 2% for 22 consecutive months.
The unexpected salary increase this year has further strengthened the belief of the Bank of Japan. A significant salary increase means that residents are unlikely to see a positive increase in income growth, household consumption income increases, and the Japanese economy is unlikely to join a more stable and continuous growth channel.
In the afternoon, the US dollar stood at 150 against the Japanese yen again. When asked about the exchange rate performance, Watanabe Ueda expressed that he would not criticize the short-term exchange rate trend. “But if exchange rate changes have a significant impact on our economy and price speculation, we are always ready to respond with appropriate monetary strategies,” he said.
In addition, analysts point out that the rise in Japanese yen interest rates may weaken the preference of Japanese investors for overseas assets, thereby driving up global bond yields. But overall, the impact of Japan’s interest rate hike on global financial markets is relatively mild.