What are the effects of rising Bank of Japan interest rates before and after negative interest rates were lifted?
In 2016/1, the Bank of Japan began a negative interest rate policy in which short-term interest rates were set at minus 0.1% in order to overcome deflation and revitalize the economy. This is a policy where financial institutions collect fees for part of the funds they deposit with the Bank of Japan. In September of that year, quantitative and qualitative monetary easing policies to induce long-term interest rates (yield on 10-year government bonds: 0.77% as of 03/14) were further promoted, and a new policy called “yield curve control” was introduced. Through this policy, we aim to control both short-term interest rates and long-term interest rates, promote economic activity, and maintain a stable rate of increase in prices of 2% or more. This policy continues even now, and we are targeting economic recovery and stable price increases.
(1) Main purposes for which Japan introduced a negative interest rate policy:
Overcoming deflation: We aim to revitalize the economy by breaking out of deflation over many years and increasing prices sustainably.
Stimulate economic activity: By keeping short- and long-term interest rates low, companies and individuals lower borrowing costs and promote investment and consumption.
Achieving the 2% inflation target: We aim to maintain a stable inflation rate of 2% and prevent adverse effects on the economy due to deflation.
Financial market stability: Through yield curve control, excessive fluctuations in long-term interest rates are suppressed, and financial markets are stabilized.
The Bank of Japan is continuing this policy and is aiming for economic recovery and price increases, but there are discussions about the effects of negative interest rate policies, and concerns about side effects have also been pointed out.
As wage increase negotiations become active during the Spring Battle, attention is being drawn to when the Bank of Japan's negative interest rate policy will be lifted. “When will negative interest rates be lifted?” There is a question, but the timing of the monetary policy meeting on March 18 or 19 may be that.
I want to read it together:Deciphering salary increases and negative interest rate cancellations in the spring battle as deciphered from the February corporate price index?
(2) Effects of the cancellation of negative interest rates
In financial markets, there is a growing view that the Bank of Japan will lift its negative interest rate policy in the near future, but even if this is realized, not all market uncertainties will be resolved. In particular, there remains great uncertainty about the course of monetary policy after the negative interest rate policy is lifted.
The Bank of Japan has declared that it has achieved the target inflation rate of 2%, and there is a possibility that the negative interest rate policy will be lifted, but it is uncertain whether the 2% inflation rate can continue to be maintained. The Bank of Japan is unsure that the inflation rate and inflation expectations will stably reach 2%, and there is a possibility that it will make policy changes due to a cutoff.
Regarding policy interest rates, the Bank of Japan has indicated that they will remain unchanged near zero for a while even after the negative interest rate policy is lifted. This is interpreted as a message to ease expectations of additional interest rate hikes in the market and maintain financial market stability, but there is also a way of thinking that if the 2% inflation rate target is actually achieved reliably, a neutral policy interest rate should be set at a level above 2%.
Under these circumstances, there is a possibility that observations that policy interest rates will be raised quickly after the negative interest rate policy is lifted will continue to spread in the market. Market participants are closely watching how the Bank of Japan evaluates the achievement of the 2% price target and adjusts interest rate policies, so the following effects and predictions are conceivable in financial markets:
(1) Impact on the stock market:
Once monetary easing is lifted, it usually means that the central bank will raise interest rates. Higher interest rates may result in higher borrowing costs and slower corporate growth. Also, as interest rates rise, bond yields may increase, making investing in the bond market more attractive. As a result, there is a possibility that funds will flow out of the stock market, which may cause stock prices to fall.
During the monetary easing period, growth stocks often show strong performance, but as interest rates rise, the cash flow discount rate increases, and future earnings of growth stocks tend to be evaluated low. This can make value stocks and high-dividend stocks relatively attractive.
Bank profits will improve due to rising interest rates, and deposit balances and loan amounts are expected to increase. Also, when wages are raised by large companies due to the spring battle, deposit balances will further increase, and it is expected that capital investment will become booming. Expectations for additional interest rate hikes are also growing in the interest rate swap market, and if the Bank of Japan implements interest rate hikesBank stocksFurther positive effects are expected.
Listed below are some of the bank-related stocks traded on the stock market. You can view each real-time chart by clicking on each link.
8306 Mitsubishi UFJ Financial Group
8316 Sumitomo Mitsui Financial Group
(2) Trends in the yen exchange rate
There is usually a possibility that the yen will appreciate due to the cancellation of monetary easing policies. The reason is that since interest rates are expected to rise, Japanese currency and assets will become attractive to overseas investors, and demand for yen will increase. However, the actual market response may fluctuate due to other economic factors and international conditions, so predictions are always accompanied by uncertainty. Therefore, it is important to pay attention to risk diversification when investing.
As a concrete example from the past, I can cite the Bank of Japan's monetary policy trends from 2006 to 2007. At that time, the Bank of Japan lifted its zero interest rate policy and gradually raised interest rates.
2006/7: The Bank of Japan raised interest rates for the first time in 6 years and lifted the zero interest rate policy. As a result, the policy interest rate was set at 0.25%.
After 2006/7: Interest rates were gradually raised thereafter, and interest rates were raised to 0.5% in 2007/2.
Movements in the yen exchange rate: The yen gradually strengthened against the dollar from mid-2006, when it was announced that monetary easing would be lifted, and in 2007 it temporarily rose from the 120 yen range to the 110 yen level. There was a phase where the appreciation of the yen progressed during this period.
(3) [Breaking News] Bank of Japan Meeting on March 19
At the Bank of Japan monetary policy meeting held on March 19, revisions to large-scale monetary easing policies were announced. Specifically,
・Negative interest rate cancellation
・Abolition of YCC
・End of ETF/REIT purchases
has been declared. These policy changes are usually expected to have an effect in the direction of increasing the value of the domestic currency, but surprisingly, the Japanese yen depreciated.
YCC is an abbreviation of long and short interest rate operation “yield curve control” (yield curve control), and it is a policy where the Bank of Japan sets fixed interest rate targets to control government bond yields. The abolition of YCC means that the Bank of Japan will end this yield curve control policy, indicating that the market will shift to determining interest rates.
ETF/REIT purchase ended: ETF is an “exchange-traded fund” (exchange-traded fund), and REIT stands for “real estate investment trust” (real estate investment trust). If the Bank of Japan announces that it will end purchases of ETFs and REITs, this means that the Bank of Japan will stop intervening in the market for these financial products. So far, the Bank of Japan has been actively purchasing ETFs and REITs for the purpose of stabilizing financial markets and supporting asset prices.
Why would the cancellation of negative interest rates cause bank stocks to fall?
On 2024/3/19, the TOPIX-17 banking index temporarily rose from the opening price of 197.96 to 201.14, but the closing price closed at 197.92. This movement is thought to have been influenced by the Bank of Japan's decision to cancel the negative interest rate policy at the monetary policy meeting. However, there was no mention of additional interest rate hikes, and it is thought that they showed a cautious stance on bank stocks in response to the announcement that “an accommodative financial environment will continue for the time being.”
Meanwhile, in response to the Bank of Japan lifting its negative interest rate policy, private financial institutions, including major banks, are considering raising interest rates on savings accounts. When a negative interest rate policy was introduced in 2016/2, banks lowered interest rates on savings accounts from 0.02% to 0.001%, but by returning policy interest rates to a positive range, banks are considering raising deposit interest rates again and steering to a “normal state where interest rates exist.” This move is usually a desirable change in a bank's earnings structure and has the potential to have a positive impact on bank stocks.
Why is the depreciation of the yen progressing while anticipating a rise in yen?
The reason why yen depreciation progresses despite the Bank of Japan's policy revisions is rooted in complex market dynamics. Below are some of the key factors.
Retrograde market predictions
Bank of Japan Governor Ueda stated that “an extremely accommodative financial environment will continue,” and the market interpreted the accommodative financial environment as long as there are no additional interest rate increases. As a result, the movement of yen sales and dollar purchases intensified, and the depreciation of the yen progressed.
Widening interest rate differences: Other countries, including the United States, have already implemented monetary tightening, and interest rate differences with Japan's easing stance are the driving force for selling yen. As long as this interest rate difference exists, it will continue to be difficult for the yen to appreciate.
Advance market forecasting and positioning: The Bank of Japan's decision was in line with the market's advance predictions, and the depreciation of the yen progressed in anticipation of the cancellation of the negative interest rate policy. The temporary fall in the dollar after the announcement and the subsequent increase in yen sales reflect the complex positioning of the market.
Future predictions
The Bank of Japan's interest rate hike and the US interest rate cut are major factors that determine the long-term trend of the dollar and yen. Attention is drawn to whether the current interest rate difference will be closed, but it is still a long way before it becomes a reality.
Since the Bank of Japan wants to maintain price stability targets, it is unlikely that monetary easing will end immediately. As long as the current easing stance continues, it will be difficult for the yen to appreciate. It is necessary to pay attention to next month's CPI index, inflation indicators, and inflation conditions.
U.S. monetary policy will be determined by the Fed's trend, but interest rate cuts are expected to be far away. Therefore, it is conceivable that the long-term upward trend of the dollar and yen will continue until the topic of a reduction in US interest rates comes up.
It is important to get clues about the future direction of monetary policy from the next FOMC and Chairman Powell's remarks.
