Will Japanese stocks die!? BOJ speculations and BOJ meetings!
Japan's 10-year government bonds reach 1.1%
On 2024/5/30, the circulation yield of Japan's new 10-year treasury bonds (374th bonds) temporarily rose to 1.100%. This increase in yield was at a high level for the first time in about 12 and a half years since 2011/12, and had a major impact on the market.
What is Kabuzaru?
I am a former securities man and part-time investor with over 30,000 total followers on SNS。
As a former securities trader, I strongly felt that “you should buy something you have confidently chosen instead of buying something recommended by someone,” and I would like everyone to invest based on such thoughts, and I am disseminating investment information on various SNS.
By making firm use of basic fundamentals, he has a reputation for stock market analysis, and has a track record of speaking at many seminars
Background of rising yields
I am a former securities man and part-time investor with over 30,000 total followers on SNS。
As a former securities trader, I strongly felt that “you should buy something you have confidently chosen instead of buying something recommended by someone,” and I would like everyone to invest based on such thoughts, and I am disseminating investment information on various SNS.
By making firm use of basic fundamentals, he has a reputation for stock market analysis, and has a track record of speaking at many seminars
Background of rising yields
This increase in yield is due to a combination of several factors. First, the effects of rising interest rates in Europe and the US can be mentioned. The fact that central banks in the United States and Europe continue to raise interest rates to control inflation has created upward pressure on global interest rates. Furthermore, there is a widespread view in the market that the Bank of Japan will make policy revisions, such as reducing government bond purchases, at the monetary policy meeting in June. The fact that Japan's 10-year government bond yield reached 1.1% reflects market anxiety about domestic and international interest rate trends and the direction of the Bank of Japan's monetary policy. As a result, the movement to sell government bonds became active, which encouraged an increase in yield.
Bank of Japan's response and market reaction
On 5/29, deliberation committee member Adachi Seiji of the Bank of Japan gave a lecture and suggested the idea of considering a full-scale reduction in government bond purchases. This further increased the tension in financial markets. The Adachi deliberation committee member stated that if prices rise due to rapid depreciation of the yen, “monetary policy response is also an option,” and emphasized the position that early interest rate hikes are not ruled out. Meanwhile, in the market, the Bank of Japan announced an offer amount of 425 billion yen for government bond purchase operations of 5 to 10 years or less on 5/13, and a reduction from the previous amount of 475 billion yen. The move came as a surprise to the market and caused a rise in domestic interest rates.
What is a background
There is a growing possibility that the Bank of Japan (hereafter, the Bank of Japan) will decide on a full-scale reduction in government bond purchases at the monetary policy meeting in 2024/6. The market also anticipates additional interest rate hikes in July, but the pace of interest rate hikes has not yet been sufficiently factored in. As a result, 10-year bond yields are rising because the market is proceeding with factoring in. In OIS, which reflects the monetary policy outlook, interest rate hikes in July have reached about 70%, but the OIS 2-year forward interest rate fell below 0.7%, and only the pace of interest rate hikes about once a year has been factored in.
In the market, there is a growing view that the Bank of Japan's pace of interest rate hikes will be faster than expected, and it is expected that further upward pressure on interest rates will be applied.
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Monetary Policy Outlook and Interest Rate Raise Skepticism
There are also many opinions that the Japanese economy cannot withstand interest rate hikes, and that it is difficult to raise interest rates as the United States moves towards interest rate cuts. The fact that policy interest rates remained below 0.5% during the two interest rate hikes since the burst of the bubble in the 1990s reinforces this view.
However, according to the main opinion of the April monetary policy meeting, there are many strong hawkish statements that the interest rate pass may be higher than what is factored in the market, and skepticism about the prospects for interest rate hikes is being showered in cold water.
However, according to the main opinion of the April monetary policy meeting, there are many strong hawkish statements that the interest rate pass may be higher than what is factored in the market, and skepticism about the prospects for interest rate hikes is being showered in cold water.
The Bank of Japan's policy approach and the possibility of interest rate hikes
Professor Toshitaka Sekine, former director of the Bank of Japan Research and Statistics Bureau, stated, “It is natural for the Bank of Japan's policy adjustments to proceed, and if the situation permits, additional interest rate increases at the June monetary policy meeting are possible.” They argue that “Japan is easing monetary too much, and considering an appropriate policy interest rate level, the Bank of Japan should raise interest rates little by little.” It has been pointed out that there is a possibility that interest rate hikes will exceed the market's forecast pace of interest rate hikes.
Kabuzaru's opinion
Market reactions to the Bank of Japan's government bond purchase cuts and interest rate hikes are mixed, and in particular, the outlook on the pace of interest rate increases is uncertain. Trends in future monetary policy meetings and changes in domestic and international economic conditions will be closely watched. In order to resolve market unease, the Bank of Japan is also required to disseminate highly transparent information and implement appropriate policies. There is an imminent need for the Bank of Japan to reduce monthly government bond purchases or show a decrease in annual government bond holdings balances while monitoring changes in long-term interest rates.
Quantitative and qualitative monetary easing (QQE), which began in 2013 under former Governor Kuroda, indicated a target of increasing the balance of long-term government bonds held by approximately 50 trillion yen per year. Going forward, it will be clear as a message to the market by showing the annual net reduction amount based on reimbursements.
Additional interest rate hikes and consumption recovery
Wages, service prices, and personal consumption data hold the key. The high wage increase rate shown in the spring battle is reflected in monthly labor statistics from June onwards, and it is necessary to check whether service prices reflect this year's wage increases. Wages are currently not keeping up with rising prices, so not being able to take aggressive policies is bothering the Bank of Japan, and since the market thinks “the Bank of Japan cannot handle it,” the rise in interest rates is accelerating.
If the current depreciation of the yen continues, real wages will not rise. Meanwhile, the weaker the yen, the higher the price increase. The Bank of Japan aims to overcome deflation, but this will not happen unless price increases and wage increases occur at the same time.
Currently, GDP is negative, and wage increases have not caught up with rising prices, so people's lives are exhausted. When prices rise under such circumstances, we fall into a state of so-called stagflation, and the situation where prices rise even though wages do not rise becomes an extremely severe economic situation for citizens. In terms of prices, the depreciation of the yen brings about the rise in prices that the Bank of Japan is aiming for, but from the perspective of people's lives, it brings about an aspect where it is difficult to realize an increase in wages. This is the current situation that is bothering the Bank of Japan, and it is a market situation where there is a divergence of ideas between the market and the Bank of Japan, and it is a market situation that moves due to speculation.
Impact and outlook of interest rate hikes
The possibility that interest rate hikes will be realized in the near future has increased, but what impact will this have?
1. Increased interest on deposits
If negative interest rates are lifted, the interest that banks pay to depositors may increase. This will allow depositors to receive more interest from the funds they keep in the bank.
2. Rise in mortgage interest rates
If market interest rates rise due to the cancellation of negative interest rates, there is a possibility that interest rates on mortgages will also rise. As a result, there is a risk that monthly repayment amounts will increase for those making new mortgages or those with existing variable interest rate loans.
3. Increased corporate borrowing costs
Businesses are similarly likely to see their borrowing costs rise. This can make it difficult for companies to invest and procure capital, and as a result, may lead to suppression of economic activity and a decrease in employment.
4. Progression of yen appreciation
Higher interest rates tend to increase the value of yen, which may lead to a decline in competitiveness for export companies. This will adversely affect Japan's export industry, and there are concerns that it will have a ripple effect on the economy as a whole.
5. Price stabilization
Higher interest rates are expected to contribute to controlling inflation. This has the effect of suppressing price increases, and it may be possible to maintain consumers' purchasing power.
6. Changes in investment preferences
There is a possibility that investment in high-risk stocks and real estate will decrease as high-yield deposits and bonds increase. As a result, asset management portfolios will change, and there is a possibility that there will be an impact on the stock market and real estate market.
Rationality is necessary to raise interest rates for all citizens, and raising interest rates is not easy. Also, since the Bank of Japan is closely monitoring not only the effects of the depreciation of the yen, but also the underlying inflation rate, the lack of a straightforward process has led to a discrepancy in speculation between market incorporation and the Bank of Japan's policies.
Future interest rate hike passes
The Bank of Japan deepens confidence that it will achieve the 2% target, and if factors such as soaring resource prices and supply restrictions overlap, interest rates may be raised to 0.5% next year, and policy interest rates will reach a high level since the burst of the bubble. In fact, the Bank of Japan has sent out that we are considering the possibility that it will be higher than what the market expects.
The Bank of Japan's flexible purchasing policy
However, we are not currently in a phase of monetary tightening. At the monetary policy meeting on March 19, the Bank of Japan lifted negative interest rates, stopped the ETF purchase policy, and indicated a flexible policy regarding the purchase of long-term government bonds.
Negative interest rates, ETF purchases, and government bond purchases are carried out as “first aid measures” when the economy temporarily plummets or is shocked. For example, it is the role of an “ambulance” that provides first aid to injured people. However, it is not always possible to ride in an ambulance. The world of market prices is the same, and until now, first aid measures have been taken to the economy by continuing “financial easing” such as canceling negative interest rates, ETF purchases, and government bond purchases, but as can be seen from rising prices, an exit from deflation has come into view. Stopping this first aid measure is called “financial normalization.”
However, when long-term interest rates rise rapidly, the Bank of Japan says it will take measures to flexibly increase the purchase amount regardless of the planned monthly purchase amount. Therefore, the current long-term government bond purchase reduction measures should not be stopped suddenly, but should be viewed as part of a flexible policy where some first aid measures are still being continued, which is different from full-scale tightening.
The Bank of Japan deepens confidence that it will achieve the 2% target, and if factors such as soaring resource prices and supply restrictions overlap, interest rates may be raised to 0.5% next year, and policy interest rates will reach a high level since the burst of the bubble. In fact, the Bank of Japan has sent out that we are considering the possibility that it will be higher than what the market expects.
The Bank of Japan's flexible purchasing policy
However, we are not currently in a phase of monetary tightening. At the monetary policy meeting on March 19, the Bank of Japan lifted negative interest rates, stopped the ETF purchase policy, and indicated a flexible policy regarding the purchase of long-term government bonds.
Negative interest rates, ETF purchases, and government bond purchases are carried out as “first aid measures” when the economy temporarily plummets or is shocked. For example, it is the role of an “ambulance” that provides first aid to injured people. However, it is not always possible to ride in an ambulance. The world of market prices is the same, and until now, first aid measures have been taken to the economy by continuing “financial easing” such as canceling negative interest rates, ETF purchases, and government bond purchases, but as can be seen from rising prices, an exit from deflation has come into view. Stopping this first aid measure is called “financial normalization.”
However, when long-term interest rates rise rapidly, the Bank of Japan says it will take measures to flexibly increase the purchase amount regardless of the planned monthly purchase amount. Therefore, the current long-term government bond purchase reduction measures should not be stopped suddenly, but should be viewed as part of a flexible policy where some first aid measures are still being continued, which is different from full-scale tightening.
Period of full-scale quantitative tightening (QT)
Full-scale QT is expected to come after a full round of additional interest rate hikes. I don't know when interest rate hikes will go round, but there are plenty of hints. I told you in the first half that one rate hike was included this year, but since 177% has been inserted towards the end of the year, it means that 1.7 times have been factored in this year. Also, 0.5% is factored in in the swap market. In other words, the Bank of Japan will raise interest rates once to 0.5%, and since that period has entered 1.7 times this year, I think it is likely that the first round will be around spring next year. The timing for next spring, when 1 year will pass since negative interest rates were actually lifted in 2024/3, will also be set for the cause that “1 year of follow-up observation was possible.”
If QT is started while short-term interest rates are being raised, there is a risk that long-term government bond yields will fluctuate drastically in an unpredictable manner, so careful judgment is required. After making an additional interest rate increase in September this year at the earliest, there is a possibility that interest rates will be raised again next year and we will move on to QT.
Full-scale QT is expected to come after a full round of additional interest rate hikes. I don't know when interest rate hikes will go round, but there are plenty of hints. I told you in the first half that one rate hike was included this year, but since 177% has been inserted towards the end of the year, it means that 1.7 times have been factored in this year. Also, 0.5% is factored in in the swap market. In other words, the Bank of Japan will raise interest rates once to 0.5%, and since that period has entered 1.7 times this year, I think it is likely that the first round will be around spring next year. The timing for next spring, when 1 year will pass since negative interest rates were actually lifted in 2024/3, will also be set for the cause that “1 year of follow-up observation was possible.”
If QT is started while short-term interest rates are being raised, there is a risk that long-term government bond yields will fluctuate drastically in an unpredictable manner, so careful judgment is required. After making an additional interest rate increase in September this year at the earliest, there is a possibility that interest rates will be raised again next year and we will move on to QT.
Evaluating interest rates and forecasting the future
Supply and demand concerns due to the Bank of Japan's purchase cuts are the main cause of interest rate increases. The Bank of Japan's monetary policy can proceed while closely monitoring long-term interest rate trends and consumption recovery data. The timing of additional interest rate hikes and implementation of QT will depend on many factors such as economic/price conditions, market conditions, and political trends. It is difficult to predict at the moment, but it is likely that flexible policy management will continue in the future. Market opinions are divided, and there remains uncertainty about future developments, but a trend of around 1% is expected in the short term. In the long run, it is necessary to keep a close eye on the effects of further interest rate increases and government bond purchase reductions. This requires a firm understanding of the background.
Supply and demand concerns due to the Bank of Japan's purchase cuts are the main cause of interest rate increases. The Bank of Japan's monetary policy can proceed while closely monitoring long-term interest rate trends and consumption recovery data. The timing of additional interest rate hikes and implementation of QT will depend on many factors such as economic/price conditions, market conditions, and political trends. It is difficult to predict at the moment, but it is likely that flexible policy management will continue in the future. Market opinions are divided, and there remains uncertainty about future developments, but a trend of around 1% is expected in the short term. In the long run, it is necessary to keep a close eye on the effects of further interest rate increases and government bond purchase reductions. This requires a firm understanding of the background.
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