To The Moon

In the past two years, in order to cope with the problem of high inflation, the central banks of major economies represented by the United States have started the rate hike cycle one after another, but Japan is an exception.

As the only remaining "negative interest rate" in the world, Japan has maintained a loose monetary policy for a long time. However, the situation has changed now.

A few days ago, the Bank of Japan announced an increase in the policy interest rate, and the negative interest rate policy that lasted for many years came to an end. It is worth mentioning that this is the first rate hike of the Bank of Japan since 2007, and the eight-year "negative interest rate era" in Japan has officially ended.

Although the Bank of Japan's move shows its confidence in economic recovery, it remains to be seen how far it can go on the road of monetary policy normalization. Some analysts believe that the fragile economic recovery may force the Bank of Japan to slow down when further raising borrowing costs. In the long run, Japanese interest rates are expected to remain near zero.

Japan Ends "Negative Interest Rate Era"

On March 19th, after the two-day monetary policy meeting, the Bank of Japan announced that it would raise the short-term interest rate by 10 basis points, that is, from-0.1% to 0-0.1%.

At the same time as the rate hike, the Bank of Japan also withdrew from the Yield Curve Control (YCC) policy, stopped buying Japanese stock exchange-traded funds (ETF) and real estate investment trusts (J-REITS), and gradually reduced the purchase of corporate bonds in the next year.

The reasons for the existence of Japan's negative interest rate policy can be traced back to the bubble economy era in 1980s. Under the long-term deflation, Japan's economy has been in a long-term downturn and its financial market is in turmoil. In order to stimulate economic recovery, the Bank of Japan has adopted a series of expansionary monetary policies. At the end of 2012, after Shinzo was re-elected as Prime Minister of Japan, the Bank of Japan increased its easing efforts, and Japan gradually moved towards the era of negative interest rates.

Specifically, since 2013, the Bank of Japan has continued to implement a large-scale ultra-loose monetary policy to promote the recovery of the economy and inflation; Since February 2016, the negative interest rate policy has been implemented to promote credit and investment growth; In September 2016, the yield curve control policy was implemented to control the yield of the 10-year Treasury Bond at a low level.

Now, although Japan's long-term monetary easing policy has promoted economic growth and inflation recovery to a certain extent, it has also led to serious monetization of fiscal deficit and severe depreciation pressure of exchange rate.

Rising inflation leads to policy shift

Why choose rate hike at this time? The central goal of the Bank of Japan's continuous monetary easing is close to being achieved, or the main consideration of its policy shift. It is understood that the Bank of Japan has been pursuing the sustainable inflation target of 2% for a long time.

When talking about why it was decided to change monetary policy at this time, Bank of Japan Governor Kazuo Ueda also said, "We have studied the recent economic situation, wage and price trends. According to the results of the spring labor negotiations, it is confirmed that the virtuous circle of wages and prices is more stable. As it is foreseeable to achieve the 2% price target, we decided to re-examine the (previous) large-scale monetary easing policy.

In fact, in 2022, Japan's inflation rate has rebounded significantly. The data shows that in 2022 and 2023, Japan's CPI increased by 2.5% and 3.2% year-on-year, respectively. The newly announced Japanese CPI increased by 2.2% year-on-year in January 2024, exceeding the central bank policy target of 2% for 22 consecutive months; In January, the core CPI increased by 3.5% year-on-year, with a growth rate exceeding 3% for 14 consecutive months.

After the interest rate turns positive, how will the yen exchange rate go?

After the Bank of Japan played a combination of rate hike, withdrawal from YCC and other tightening monetary policies, the Nikkei 225 Index returned to 40,000 points, but the exchange rate of the Japanese yen against the US dollar fell, once falling to a two-week low. Why?

Justin Hu, a professor at Shanghai Institute of Advanced Finance of Shanghai Jiaotong University, said that after the interest rate turned positive, it was theoretically beneficial to the strengthening of the yen exchange rate, but the market had digested the news through expectations before. Therefore, after the announcement of the Bank of Japan's decision, the short-term fluctuation of the exchange rate is not an indicator.

Ignoring the short-term fluctuation of exchange rate, the positive factors promoting the appreciation of yen are increasing in the long run.

In addition to Japan's own monetary policy, whether the Federal Reserve cuts interest rates or not is also a key factor affecting the trend of the yen. If the Federal Reserve starts to cut interest rates, the spread between the United States and Japan will narrow significantly, the US Dollar Index will be under pressure, and the yen will also enter the appreciation channel.

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