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The Tokyo Stock Exchange ended sharply lower following the announcement by the Bank of Japan of a relaxation of its tight control of Japanese bond yields. A decision which makes the yen jump, but which surprises, because it goes once morest the other major central banks in the world. Explanations by Guillaume Dejean, exchange rate analyst within the Western Union Business Solutions group.
RFI: Why is the Bank of Japan keeping its rates low, while in the United States, Europe, England and Australia, central banks have on the contrary raised their rates in an attempt to calm inflation?
Guillaume Dejean : Japan has been immune to tensions over supplies from China, but also to soaring energy prices. Which means that inflation in japan is certainly growing, that it follows the global dynamic, but it is only at 3.7%, whereas in the United States it has risen to 7.7% and to 10.1% in the euro zone. The second point is that the Japanese are always afraid of deflation, and that this fear slows down central bank decisions. However, a slightly more unstable global context must be added. The result is that we kept an accommodating monetary policy in order to be able to both support the Japanese economy and control the rise in inflation.
However, debates are beginning to emerge in the face of this unprecedented surge in inflation in Japan. We are beginning to think that there may be a serious problem with prices, which will have to be resolved. And also that the ultra-accommodating policy as in the past is perhaps disconnected from economic reality.
RFI: It is still the world’s third largest economy. Why are the stock markets, starting with that of Tokyo, reacting badly?
Guillaume Dejean: Precisely because of the weight of the Japanese economy in the world economy. The markets had been waiting for a move from Japanese bankers for a long time. But they certainly did not expect this to happen at the end of the year. The surprise was total. And now, investors are anticipating other decisions that might come in 2023. They say to themselves: if the Bank of Japan starts to adjust its monetary policy today, that means that a first rate hike might follow.
On the other hand, we must not forget that Japan is one of the biggest creditors in the world. It is the largest foreign debt holder in the United States (before China), but also in France or Australia. This means that if interest rates rise in Japan, they will be more attractive to Japanese investors. They will start buying Japanese sovereign debt. And for that, they are going to need money. The risk is that Japanese capital will leave these foreign countries and move to Japan.
The importance of such an outflow of capital is not purely anecdotal. In Japan, there are large pension funds, including funds that pay their pensions to the Japanese. Until now, the returns in Japan being minimal, the managers of these pension funds turned to foreign assets. If tomorrow, the Bank of Japan raises its rates, they might turn to local assets. Everything will depend on the new monetary policy, which might change more quickly than expected.
RFI: And why is that?
Guillaume Dejean: In April 2023, a new governor should be appointed to head the Bank of Japan. There is a chance that this new boss will choose a slightly less accommodating policy and proceed with a first rate hike. This possible change is now anticipated by the markets. With, undeniably, a speculative effect on the yen, the Japanese currency has once once more become attractive.
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