Japan ended negative interest rate policy. Why did the yen fall in response? What is the impact on the economy?

On March 19, the Bank of Japan announced the end of its eight-year negative interest rate policy.

Specifically, the Bank of Japan will support the unsecured overnight lending rate to remain within the range of 0% to 0.1%, in line with market expectations. In order to achieve this interest rate guidance, the Bank of Japan increased the interest rate on excess reserve deposits of commercial banks with the Bank of Japan from the previous -0.1% to 0.1% (excluding statutory reserves). The new interest rate will take effect on March 21.

Why was the end of the “negative interest rate” era announced this month?

Hu Jie, a professor at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University and a former senior economist at the Federal Reserve, told The Paper that since Japan’s inflation rate has been positive for more than two and a half years since August 2021, the market generally expects the Bank of Japan to give up the policy that started in 2016 this year. implement a negative interest rate policy. This month’s central bank’s decision is the result of Japan’s escape from the deflation trap since August 2021, and the economy has been improving positively.

Bai Xue, an analyst at Oriental Jincheng Research and Development Department, analyzed that the Bank of Japan raised interest rates for the first time since February 2007, mainly because Japan’s inflation rate has rebounded significantly since 2022, thus breaking the long-standing dilemma of structural deflation ( That is the basis for Japan’s previous long-term implementation of negative interest rates). Against the background of Japan's strong economic trend, Japan's CPI will be 2.5% and 3.2% year-on-year respectively in 2022 and 2023. The latest Japanese CPI in January 2024 is 2.2% year-on-year, exceeding the central bank's policy target of 2% for 22 consecutive months. ; Core CPI in January was 3.5% year-on-year, exceeding 3% for 14 consecutive months.

In addition, the results of this year's "spring fight" in salary negotiations far exceeded expectations. The salary increase in fiscal year 2024 will reach 5.28%, which is not only much higher than last year's 3.8%, but also the largest increase since 1991. This means that Japan's inflation will continue this year. remain above policy targets. Therefore, the expected realization of inflation levels is the main reason supporting the Bank of Japan to make major adjustments to monetary policy and exit the negative interest rate policy.

What impact will exiting "negative interest rates" have on the economy? Is the interest rate hike cycle approaching?

“This resolution can only be said to mean that the Bank of Japan has ended the eight-year ultra-loose monetary policy cycle since February 2016.” Professor Wang Jinbin, executive deputy secretary of the Party Committee and deputy dean of the School of Economics at Renmin University of China, analyzed to The Paper Said that Japan's current monetary policy is still relatively loose, even after the end of negative interest rates, it is still relatively loose, because the current interest rates are basically a transition from negative interest rates to zero interest rates.

Regarding the forecast for Japan's economy, Wang Jinbin said that according to the current forecasts of some international institutions and the Bank of Japan's own judgment, based on Japan's real GDP growth of 1.9% last year, Japan's economic growth rate this year will be lower than last year.

Hu Jie believes that since 2021, Japan’s economic performance has been relatively strong. However, dragged down by the European and American markets, its GDP growth rate is likely to fall back this year. The year-on-year growth rate of GDP in 2024 is expected to be around 1.0%, but the unemployment rate remains low below 2.5%, and the inflation rate remains relatively healthy and positive around 1%-3%.

Shirayuki said that since December 2022, the Bank of Japan has made preparations to promote the normalization of monetary policy: it has raised and modified the yield curve control policy (YCC) in December 2022, July and October 2023. Flexible cap. In October 2023, the absolute upper limit of 1% will be changed to a reference upper limit, which means that the YCC policy is almost "in name only." Beginning in the first quarter of 2023, another area where the Bank of Japan may further normalize monetary policy: policy expectations for exiting negative interest rates have begun to rise. Therefore, the end of the Bank of Japan's negative interest rate policy is mainly based on policy considerations based on the country's economy and inflation levels, and is not related to expectations of an interest rate cut by the Federal Reserve. In terms of follow-up policy trends, considering that there is still some uncertainty about whether Japan's rising inflation momentum can be sustained, the Bank of Japan will remain cautious in the pace of interest rate increases.

Wang Jinbin believes that after ending the negative interest rate policy, the Bank of Japan will continue to wait and see and will not immediately start an interest rate hike cycle.

Hu Jie said that after the central bank ends its negative interest rate policy, there is a high probability that it will continue to wait and see. The Bank of Japan has been cautious about the sustainability of positive inflation. After January 2023, the annual CPI growth rate has continued to decline, reaching the current 2.2%, which is very close to the ideal target of 2%. Under this circumstance, the Bank of Japan should carefully observe the subsequent trend of CPI rather than act rashly.

With the yen returning to positive interest rates, what will be the direction of the yen against the US dollar?

The yen's return to positive interest rates has raised a question worthy of attention: whether Japan's $4.4 trillion in overseas funds will accelerate its return to the country. Hu Jie judged that due to the small increase in interest rates and the fact that the Bank of Japan will act cautiously in the future, the trend of capital reflow should be gradual and smooth, and there will be no waves. In addition, the Japanese yen will show a stronger trend relative to the US dollar this year, mainly considering that the US dollar is likely to cut interest rates during the year and the Japanese yen will abandon the negative interest rate policy. This is the main factor driving changes in the exchange rate between the two in the future.

However, it is worth noting that after the Bank of Japan raised interest rates this time, the yen exchange rate fell sharply against the US dollar, once falling to a two-week low.

Hu Jie analyzed that after the interest rate turns positive, it will theoretically be conducive to the strengthening of the yen exchange rate, but the market has digested this news through expectations. Therefore, after the announcement of the Bank of Japan's decision, the short-term fluctuations in the exchange rate do not have an indicator nature.

Wang Jinbin pointed out that after the Bank of Japan exits negative interest rates, major Japanese yen assets and U.S. dollar assets will face liquidity problems. Japan’s external assets will sell off part of them. In addition to returning to Japan, it is obvious that the interest rates of Japanese assets themselves will rise. That is to say, after the original negative interest rate policy ends, its asset prices will fall. Part of this part of the decline line may also chase U.S. dollar assets. Therefore, there will be fluctuations in the short term, and there will not be an obvious appreciation trend of the exchange rate of the yen against the US dollar.

Bai Xue analyzed that the Bank of Japan has ended its negative interest rate policy, and the Federal Reserve is expected to cut interest rates about three times this year. This means that the key driver of the U.S. dollar against the Japanese yen exchange rate, that is, the U.S.-Japan interest rate differential will narrow significantly, which will promote the short-term The Japanese yen has greater appreciation pressure and the U.S. dollar index is under pressure. Since Japanese yen assets play an important role in the global capital market, rising interest rates in the Japanese yen will cause international capital to flow back to Japan from emerging markets and other developed countries. This may trigger turmoil in the global capital market, especially economies that rely on Japanese capital inflows, which may face capital outflow pressure, thereby increasing the risk of financial market instability and increasing the debt pressure of economies holding Japanese yen debt (especially are some Asian and Latin American economies). At the same time, as the Japanese yen is an important safe-haven currency, its appreciation may lead to a decrease in the pricing cost of commodities, thereby indirectly curbing global inflation.