With the Bank of Japan’s expected end to the world’s last negative interest rate policy, its far-reaching impact on the global economy and the volatility of the yen exchange rate has attracted widespread attention.
Index
The End of Negative Interest Rates and Expectations of Rate Hikes
Adjusting the Bank of Japan’s Balance Sheet
The Future Direction of the Japanese Economy
With the Bank of Japan’s announcement that it will end its “negative interest rate policy,” economists and market observers around the world are closely watching the impact of this change on the world’s fourth-largest economy (Japan recently fell to the 4th position behind Germany).
This policy shift marks the end of the Bank of Japan’s more than a decade-long large-scale quantitative easing policy, and whether it can bring positive help to the Japanese economy is also of great concern.
According to market observers’ predictions, the Bank of Japan may end its negative interest rate policy as early as April this year. A recent survey shows that over 90% of economists expect the Bank of Japan’s new target interest rate to be set between 0 and 0.1%.
Bank of Japan Deputy Governor Shinichi Uchida also mentioned in a speech on February 8th that the Bank of Japan may use the excess reserve ratio as the main policy leverage and set its target range at 0-0.1%.
Uchida’s remarks have prompted expectations for the interest rate path after the rate hike. According to his speech, the market expects that the interest rate may increase by about 50 basis points in the next two years. However, Uchida did not directly support or deny these expectations, but emphasized that these are only market reference points.
On the other hand, the Bank of Japan will face the challenge of adjusting its massive balance sheet. Currently, the Bank of Japan holds about half of Japan’s ¥1,200 trillion (about $8 trillion) bond market.
In the process of policy change, the Bank of Japan may set a new upper limit for yields or abandon this practice and continue to announce the quantity of bonds to be purchased each month.
At the same time, the Bank of Japan will also need to deal with its stock investments. Uchida pointed out that it is a natural process to terminate stock purchases during policy normalization. Currently, the Bank of Japan has become the largest holder in the Japanese stock market, indicating that the Bank of Japan is unlikely to resume regular purchases of ETFs and real estate investment trust funds.
With this major shift in the Bank of Japan’s policy, the Japanese economy will enter a new stage, which is expected to have a profound impact on Japan and the global economy.
How the Bank of Japan balances the dual tasks of economic growth and inflation control, as well as how it handles its massive balance sheet, will be the focus of global economic attention in the coming years.
With the end of the last negative interest rate policy country in the world, where will the Japanese economy go? This will be a question worth paying attention to in the market in the near future.