Huatai Securities: Multiple factors push up the yen, paying attention to Haru Dou and the Bank of Japan’s interest rate meeting

Multiple events last week raised expectations for Japan to raise interest rates in March, and the yen appreciated significantly last week. On March 9, Japan Jiji News Agency reported that the Bank of Japan was considering canceling the yield curve control (YCC) plan. The union's average salary increase demand announced by Rengo on March 7 was 5.9%, significantly higher than last year's 4.5%, stimulating the market's longing for the results of the spring competition announced on March 15. As a result, the market's expected probability of the Bank of Japan's March meeting to raise interest rates for the first time rose from 35% to 67% last week. As a result, the Japanese yen exchange rate appreciated and exceeded the 147 yen/US dollar mark.

On the morning of March 11, Japan significantly increased its revised GDP for the fourth quarter of 2023, further boosting expectations for interest rate hikes. Japan released the adjusted value of GDP in the fourth quarter of 2023. The real GDP quarter-on-quarter annualized growth rate was revised upward from -0.4% to +0.4%, a significant increase of 0.8pct from the previous increase. As a result, Japan's economy will expand by 1.9% throughout 2023. From a sub-item perspective, the growth rate of equipment investment has been significantly increased, and the contribution to GDP has increased by 1.5pp, indicating that Japan's production capacity cycle is strong.

The Bank of Japan’s interest rate meeting on March 19 may be a historic interest rate meeting. The market predicts that the probability of raising interest rates from -0.1% to 0% is nearly 70%. If realized, it will mark Japan's exit from the negative interest rate policy that has been maintained for nearly 10 years and officially end the ultra-loose monetary policy since 2013. Japan's short-term interest rates, which have been near zero since 2008, are also expected to start rising.

The results of the 2024 spring war, which will be announced on March 15, will greatly affect the decision to raise interest rates. It is expected that the spring wage increase may exceed the 3.6% in 2023 and reach a 30-year high. Employers have taken a relatively positive stance on salary increases, with many large companies such as Lawson and Aeon announcing higher salary increase plans than last year. The government also continues to introduce tax incentives and other measures to encourage companies to increase wage growth. According to the Spring Dou wage model constructed by the agency, it is expected that the Spring Dou wage growth rate in 2024 may be higher than the 3.6% in 2023.

Given that the Federal Reserve may cut interest rates in May or later, the Bank of Japan may have a window to raise interest rates in March-April. It may raise interest rates several times this year slightly and keep the real policy interest rate substantially negative. The Bank of Japan may still have "psychological shadows" about the risk of structural deflation and hopes to consolidate the reflation trend, so the pace of interest rate hikes may be more cautious. Since 2023, the Bank of Japan has fine-tuned its ultra-loose monetary policy many times, but it still frequently intervenes in the government bond market and maintains negative policy interest rates. However, considering that "normalization" opens up space for future monetary policy and that positive interest rates promote the "metabolism" of the corporate sector, the Bank of Japan may eventually raise interest rates slowly.

If the Bank of Japan raises interest rates, the overall impact on the cash flow of domestic residents and companies will be small. After the asset bubble burst in 1990, Japanese residents and corporate balance sheets were severely damaged and experienced a "lost twenty years." Since then, with the support of the Japanese government's fiscal expansion and ultra-loose monetary policy, the balance sheets of Japanese residents and companies may have completed repairs. The ratio of liabilities to total assets in the residential sector has dropped from about 32% in 1998 to 18.2% in the third quarter of 2023. As of the third quarter of 2023, cash deposits accounted for 52.5% and 23.7% of the assets of residents and non-financial enterprises respectively. Therefore, the Bank of Japan's interest rate hike will have a small overall impact on the cash flow of domestic residents and companies, and may even increase interest income.

If interest rates are raised, it will further narrow the interest rate gap between the United States and Japan and push up the yen; considering that the potential impact of Japan's interest rate hikes and U.S. interest rate cuts on global liquidity are not the same, the impact of Japan's interest rate hikes on global asset prices is generally controllable. At the same time, raising interest rates will promote the conversion of Japan's growth momentum and market performance from external demand to domestic demand. As of the third quarter of 2023, Japan's total overseas assets are approximately US$10.2 trillion, of which approximately US$4 trillion are securities investments with short- and medium-term investment periods. Judging from the proportion of the corresponding stocks, Japanese investors have treasury bonds in Australia and the Netherlands. The proportions in 2019-2020 were significantly higher, reaching 10.9% and 9.4% respectively. The increase in the return rate of the yen may promote the return of some overseas investments with low returns to Japan.