On Wednesday, July 31, the Bank of Japan announced its latest interest rate decision, announcing a 15 basis point rate hike, raising the policy rate to 0.15%-0.25%. This move far exceeded market expectations.
At the same time, the Bank of Japan announced that the scale of government bond purchases would be reduced by 400 billion yen per quarter, and it would no longer provide a range of bond purchases but a specified amount. The Bank of Japan voted unanimously to reduce the scale of bond purchases, but it was less than the previous expectation of reducing by 1 trillion yen per month.
Given the extremely low standards set by the Bank of Japan, this can be said to be the Bank of Japan's toughest action so far, which attracted the attention of the world for a while.
Is the yen at a turning point?
The US dollar against the yen fluctuated violently in the short term and is currently below 150. The Nikkei 225 index continued to fall after the Bank of Japan's decision, and the Japanese 10-year government bond futures narrowed their intraday losses after the Bank of Japan announced the interest rate.
Source: uSMART SG
Prices may rise, and the Bank of Japan may be "more hawkish"?
In a written statement, the Bank of Japan pledged to consider further rate hikes if the outlook for economic activity and inflation remains favorable. Meanwhile, Nick Twidale, an analyst at ATFX Global Markets, noted that the central bank's bond reduction was much smaller than market expectations, which was a major blow to the yen.
However, analysts Tooru Fujioka and Sumio Ito believe that the yen may have reached a turning point. The measures currently implemented by the Bank of Japan may stimulate market expectations that another rate hike may be possible this year. The hawkish stance of the Bank of Japan may herald a turnaround for the yen as traders expect the interest rate gap between the United States and Japan to narrow as the Federal Reserve is about to meet. If the Federal Reserve hints that a rate cut may be possible in September, this will further support this view.
In terms of inflation forecasts, the Bank of Japan slightly lowered its core CPI forecast for fiscal 2024/25, while the core CPI forecast excluding energy remained unchanged. Specifically, the core CPI forecast for fiscal 2024 is 2.5%, down from 2.8% previously; the core CPI forecast for fiscal 2025 is 2.1%, up from 1.9% previously; the core CPI forecast for fiscal 2026 remains at 1.9%. In addition, the core CPI excluding energy is forecast to be 1.9% for fiscal 2024, the same as before; the corresponding figures for fiscal 2025 and fiscal 2026 are also expected to remain at 1.9% and 2.1%.
The Bank of Japan also stressed that changes in the yen exchange rate are more likely to affect domestic prices than before, especially considering the rise in import prices, and it is necessary to be vigilant about the risk of inflation rising too quickly. Nevertheless, private consumption in Japan currently shows a certain degree of resilience, and companies are also gradually raising wages and product prices. The central bank expects that loose monetary policy will continue to support the economy, while real interest rates are expected to remain significantly negative.
Izuru Kato, chief economist at OTAN Research, believes that the decision to raise interest rates may be to correct overly loose monetary policy and reflect that the real policy interest rate has entered negative territory. Although the central bank has always emphasized that monetary policy is not aimed at money, the weak yen has had a negative impact on small and medium-sized enterprises in rural areas of Japan, which is undoubtedly an important factor behind the decision to raise interest rates. Kato pointed out that the rate hike is small and symbolic, and the market does not need to worry about the rate hike speeding up. The rate hikes by the Bank of Japan in March and July are only equivalent to the level of one-time rate hikes by ordinary central banks, which does not mean that the central bank has suddenly turned hawkish.
Japanese stocks plummeted
On August 1, the Nikkei 225 index fell rapidly after opening, and the decline quickly widened to more than 2.5%. The U.S. stock market rose across the board, and the South Korean stock market also performed strongly that morning.
Analysts pointed out that this decline in the Japanese stock market may be driven by two major factors. First, the continued appreciation of the yen has had a significant impact on the market. That morning, the USD/JPY exchange rate broke through the key psychological mark of 150, which exceeded the expectations of many foreign exchange market investors. Previously, the market generally believed that the appreciation of the yen was limited, but the reality has raised concerns about the outlook for the Japanese economy.
Second, the market has seen the so-called "seesaw effect." Since the beginning of this year, the Japanese stock market has achieved a large increase, and against the backdrop of the central bank's interest rate hike, international capital may begin to seek value depressions and turn to other markets. For example, just the day before, foreign capital flowed into China's A-share market in large quantities, with a net inflow of nearly 20 billion yuan.
Judging from previous market trends, the Japanese stock market often performs poorly during periods of yen appreciation. Some analysts believe that the central bank's interest rate hike this time may exacerbate market concerns about the Japanese economy, mainly reflected in the following three aspects:
- Rising mortgage pressure: As the yen appreciates, mortgage interest rates may rise, which will increase the cost of living for families and thus affect consumption levels.
- Increased corporate costs: The rise in corporate loan interest rates will increase the operating costs of companies, affecting their profitability and investment decisions.
- Affected exports: Although the appreciation of the yen is conducive to reducing import costs, as an export-oriented economy, Japan may face the risk of declining export competitiveness.
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