After the end of the era of ＂negative interest rate＂, the situation behind the Bank of Japan’s interest rate hike has changed.
Source: Business School Magazine
Although China’s financial industry is confident to cope with the policy shock caused by the Bank of Japan’s turn, China’s financial institutions must take precautions, adhere to the principle of macro-prudence, and accelerate their business and digital transformation.
Text | Yan Jiajia Shi Dan
ID | BMR2004
The "boots" for the Bank of Japan to raise interest rates for half a year finally ended on March 19th this year. The Bank of Japan announced that it would raise the benchmark interest rate from -0.1% to 0~0.1%, and at the same time cancel the yield curve control (YCC) policy. Realized the first rate hike in Japan’s macro-monetary policy in 17 years, ending "Abenomics"Eight years of negative interest rates.
The world’s three major central banks (Federal Reserve, European Central Bank and Bank of Japan) have finally achieved nominal unification of interest rate policy direction (interest rate increase) after the US subprime mortgage crisis. At present, the world’s major economies, only China is in the stage of interest rate cuts. This also reminds China’s financial industry that it must be fully prepared and carefully handle the policy fluctuations of the three major central banks in the world, so as to maintain the prosperity and stability of China’s financial market, the internationalization of the RMB system and the stability of the RMB exchange rate.
So, what are the considerations for Japan to raise interest rates this time? What impact will Japan’s interest rate hike have? What is the future trend? How is it related to the upcoming shift of the Fed’s monetary policy? For China’s financial market, what should be the focus of Japanese interest rate hike?
01
Driving factors of Japan’s monetary policy shift
Japan’s low interest rate policy has been maintained for 25 years. As early as 1998, Japan’s interest rate fell to 0.25%, but it has not yet fallen to zero and negative interest rates.
"Japan’s long-term failure to raise interest rates can be traced back to 40 years ago. In the early 1980s, the bilateral trade friction between Japan and the United States continued to intensify, and the trade war gradually escalated into a currency war. The United States, Japan and other countries signed the famous Plaza Agreement, which triggered a sharp appreciation of the yen and accompanied by the rapid expansion of asset prices, which also led to the bursting of Japan’s bubble economy, which in turn triggered a sluggish domestic economy in Japan. At first, the Bank of Japan implemented a zero interest rate policy. By the end of 2012, Shinzo Abe came to power for the second time and began to implement the "Abenomics". Since then, the Bank of Japan has implemented a negative interest rate policy, which is known as the "different-dimensional" monetary policy. In other words, private banks in Japan have to deposit money with the Bank of Japan, not only without interest, but also with management fees. This is enough to show that the Japanese government and the Bank of Japan want to stimulate economic growth through active financial easing policies. " Dr. Dou Shaojie, a researcher at the Global HRM Research Center of Waseda University in Japan and a researcher at the SME Management Research Center of Tongshe University, told the reporter of Business School.
Chen Jia, an independent international strategy researcher and former researcher at the International Monetary Institute of Renmin University of China, said, "Before Shinzo Abe took office and began to focus on promoting the’ Abenomics’, Japan had been trapped in the’ lost decade’: the population was aging and the young people were flat; Weak investment in the real economy, low efficiency of enterprises and stall of scientific and technological innovation; Repeated shocks of the yen, rampant cross-border arbitrage, etc. Although previous Japanese prime ministers saw the problem, their targeted strategies were ineffective and were repeatedly bounced back by public opinion, which led to giving up halfway. Since Shinzo Abe took office, he has drastically implemented reform measures in the financial and social fields, especially the implementation of the’ Abenomics’ in macro-financial and monetary policies, aiming at vigorously stimulating Japan’s deep economic fundamentals. "
Gu Qinhua, a member of the North American Doctor of Laws Club, once worked in a Jewish international law firm as a cross-border transaction and investment consultant and lawyer, told the reporter of Business School that Japan has been in a low interest rate or even negative interest rate environment, with the aim of jumping out of the middle income trap. The government has adopted a monetary policy to continuously stimulate the economy, in which the negative interest rate policy is to make the funds not be deposited in the bank, but become idle funds. Not only Japan, Europe, the United States and other countries have also implemented negative interest rate policies, which is the performance of loose monetary policy to the extreme. Abe’s "Three arrows"(monetary easing, fiscal policy and growth strategy), through the way of" helicopter money ",that is, during the economic depression, through the maximum easing policy to stimulate the economy.
Since 1989, Japan has raised interest rates five times in a row in order to curb the rising real estate prices and economic inflation in Japan at that time. However, the consequence was that the "hot money" that poured into Japan was evacuated one after another, and the bubbles in Japan’s stock market and property market burst, and it was not recovered until the subprime mortgage crisis in the United States in 2007. From a macro perspective, after Japan’s economic bubble burst in the 1990s, it fell into a typical ".middle income trap"At the same time, the Great Depression appeared in political economy, and the phenomenon called deflation appeared in the development of national economy. As a result, Japan has made up its mind to solve the problems of economic depression, overcapacity and deflation that are easy to occur in the middle-income trap.
Gu Qinhua believes that there are three steps to solve the "middle income trap" globally. The first step is to let companies and individuals with overcapacity and debts jump out of the "trap" and enter a promising foreign market. If these enterprises toss in the "trap", they will only get deeper and deeper. The way for Japan to get rid of the trap of depression, deflation and middle income is to jump out of the Japanese market and play a role in other markets full of opportunities. Take Toyota Motor Corporation of Japan as an example, its overseas output is rising steadily, which is about twice the domestic production value. It is not difficult to understand that building a car overseas requires huge amounts of money, and Japan’s loose monetary policy can allow huge amounts of money to support Japanese companies to go to sea. Enterprises that make money can continue to feed back the country and pay off debts.
The second step is to clear the sludge caused by debt in the "trap". The third step is to spend huge sums of money to directionally polish and cultivate more promising and competitive new products and fields. Any one of these steps can not be separated from the stimulus and support of the government’s massive cheap funds. The nature of capital and capitalist is profit-seeking, and the cheap yen gave birth to the yen carry trade. This kind of transaction using spread arbitrage is not a major means for financial products to jump out of the "trap" and enter other markets to make money.
Judging from the actual use of cheap yen, the proportion of foreigners borrowing money in Japan and investing overseas in places with higher interest rates is relatively small. Most of the funds were used by the Japanese in three aspects: on the one hand, overseas expansion. Toyota and other auto companies go to sea and even invest in American technology companies and new markets (such as China); The second aspect is to invest in the largest foreign exchange market. For example, there is a powerful force in the foreign exchange market called "Mrs. Watanabe". In Japan, men earn money, and women do housework at home. Over time, women begin to take charge of financial power. This special group of people is a fresh force in the foreign exchange market, and they hold a lot of dollars and other currencies. Foreign exchange trading has given birth to Japan’s great progress in computer, quantitative trading software, High-Frequency Trading (HFT), communication, artificial intelligence and artificial intelligence industries. The third aspect is overseas investors. Mainly American investors and hedge funds, but also some European and Asian investors, such as the interest rate increase of the Japanese yen, will have an impact on the property market, stock market, foreign exchange market and bond market in China Mainland and Hongkong.
Japanese investment banks are the main force in the financing of China’s state-owned enterprises and private enterprises. For example, Softbank has invested in many high-tech enterprises in China. These investments come not only from project financing and equity financing, but also from the Japanese government, various financial institutions and investors. However, Softbank may have recovered its capital out of pressure (transferring its shares and replacing them with Japanese yen to pay its debts).
It is worth noting that Japan’s low interest rate policy of not raising interest rates for a long time came to an end because of two kinds of pressures.
The first pressure comes from inflation. Japan’s financial sector has achieved the rise of its balance sheet after years of "struggling for a living". Japan cleared its debts in the 1990s, and the economy began to brew new momentum. Japan’s inflation used to be imported inflation. Now wages and stock market are rising, and the inflation rate is also rising. Therefore, both the traditional financial school and the post-financial school believe that the monetary interest rate should be normalized. Otherwise, the Bank of Japan, the core management institution of the government, will fail in its important position of regulating the effective, orderly and organic development of the domestic economy through monetary policy.
The level of inflation tolerated by Japan’s domestic economy, like the United States and European countries, is basically set at around 2%. If the actual inflation rate in Japan far exceeds 2%, then wages, labor insurance and welfare for the elderly should be adjusted and increased according to the inflation rate. Once inflation goes up, the pressure on government spending will increase significantly. Coupled with the severe aging of Japan’s population, most of Japan’s fiscal expenditure is spent on the elderly, so the ideal state is no inflation and no need to increase expenditure. If there is inflation, we must adjust the welfare of the elderly. In the past, Japan did not raise interest rates because most of the previous inflation was external.Imported inflationIt is not caused by internal reasons, but now that internal inflation is rising, the central bank has to raise interest rates.
So is America. Since the beginning of 2022, the United States has experienced a high level of inflation, which is caused by global supply chain problems, rising energy prices and tight labor market caused by the COVID-19 epidemic. In this case, the Federal Reserve has taken measures to raise interest rates to curb inflation and maintain economic stability. The purpose of raising interest rates is to reduce aggregate demand by raising borrowing costs and reducing consumption expenditure and investment, thus curbing inflation. Even if the national debt of the United States has reached $35 trillion, the interest rate on the debt will be very heavy after the interest rate increase, but the Fed has to raise interest rates, because fighting inflation is the first task of the Fed.
The second pressure comes from the currency appreciation caused by the trade surplus. Due to the great progress of Japan’s manufacturing capacity, foreign trade products and services and the long-term trade surplus, it will certainly be intimidated by other countries’ demands for currency appreciation. Just like the background of the Plaza Accord, countries forced the yen to appreciate rapidly through the Plaza Accord, because at that time, the United States and European countries all had pressure on Japan’s trade deficit.
Without the pressure of domestic inflation and trade surplus, the Japanese government is willing to keep easing, which is a big move for it to jump out of the middle-income trap.
Dou Shaojie said that at that time, "Abenomics" wanted to achieve the recovery and development of the Japanese economy, and set several indicators, the most important of which was the price index, which rose by 2% every year. But in fact, despite the Japanese government’s efforts, this 2% target has not been achieved until the outbreak of the COVID-19 epidemic.
This move by the Bank of Japan actually confirmed two indexes. One is that the price index has risen by 2% for two consecutive years, and the second index is that the wage increase rate has reached 5%. However, among these two indexes, the first price index has indeed achieved a 2% increase for two consecutive years, but whether the second index has really been achieved remains to be discussed. Because the wage increase rate of large Japanese enterprises did achieve a 5.2% increase for the first time in the "Spring Fight" in March this year ("Spring Fight" is a national labor-management negotiation held in Japan every spring, which plays a guiding role in the annual wage increase in Japan), but the wage increase rate of small and medium-sized enterprises, which account for 99.7% of the enterprises, has just exceeded 4.5%. Another suspense is whether wage increase and price increase have really achieved a virtuous circle. Because although wages seem to have increased, compared with the price index, the increase rate is not enough, and the real wage growth rate remains at a negative growth level (-0.6%, January 2024), and it has been negative for 22 consecutive months. It can be seen that domestic consumption in Japan has not really developed.
In fact, Kazuo Ueda, the president of the Bank of Japan, resisted Abenomics from the very beginning, and he held different views on the Bank of Japan’s continuous loose monetary policy. When he took over from former president Kuroda in 2023, there were many voices speculating that "will he cancel the negative interest rate monetary policy as soon as he takes office?" From the adjustment effect on March 19th this year, it can be seen that the Bank of Japan’s interest rate hike did not cause a sharp drop in the stock market, nor did it cause a large fluctuation in the yen exchange rate. This is obviously the effect that the Bank of Japan "released the wind" in advance and was digested by the market.
Generally speaking, the reason why the Bank of Japan adjusted its monetary policy is that the Japanese economy has achieved a moderate recovery on the one hand, and wages have risen moderately on the other. The adjustment of monetary policy is to make the virtuous circle between wages and prices more stable. On January 23, 2024, the Outlook on Economic and Price Situation issued by the Bank of Japan pointed out that the growth rate of women and the elderly participating in labor slowed down, the supply and demand of labor was further tense, and the pressure of wage increase would increase.
From the perspective of the supply side, women and the elderly have participated in the labor market in the past 10 years or so. These labors have increased supply and demand, and as a result, wages have not risen. At present, the growth rate of women’s and the elderly’s participation in labor is slowing down, and their wages are facing upward pressure. Just like migrant workers in China go to cities, the hourly wages of inexhaustible migrant workers will be very low, and the wages will rise rapidly when there is a shortage of migrant workers. This will bring the pressure of rising labor costs in terms of cost, and at the same time help to increase the purchasing power of families. At present, the Japanese government believes that it can withdraw from the negative interest rate and YCC policy and realize a virtuous circle of wages and prices.
02
Global monetary and financial markets may fluctuate.
Chen Jia said that as we all know, the Bank of Japan’s monetary policy, especially interest rate decision, followed the Fed for a long time after World War II, which is the famous phenomenon of "three central banks strike one blow and three earthquakes" in the global monetary history that we have observed in the past 40 years, that is, as long as the Fed raises interest rates, the Bank of Japan and the European Central Bank always "resonate at the same frequency". However, over the past year or so, the Federal Reserve has taken the initiative to raise interest rates in order to control the ultra-high inflation in the United States. In the same period, among the three major central banks in the world, only the European Central Bank maintained the general direction of following the Fed’s monetary policy for its own purpose of suppressing high inflation. Limited by its stagflation and Abenomics orientation, the Bank of Japan "parted ways" with the Federal Reserve for the first time in decades.
Focusing on more than a year before the Bank of Japan raised interest rates, the United States and Europe raised interest rates and China and Japan cut interest rates, which are the fundamentals of global macro-money. Most global financial centers with the US dollar system as the main trading system generally have high market interest rates, which leads to the widening gap between the benchmark interest rates in the offshore and onshore markets of China financial markets, and the benchmark interest rate in the offshore RMB market is generally higher than that in the mainland.RMB benchmark interest rateLooking back, the recent difference between offshore RMB and onshore RMB in deposit interest rate has become increasingly prominent, which is essentially a realistic response to the huge gap between the major central banks in the world in the direction of monetary policy.
Less than a year after the tentative introduction of YCC deregulation, the Bank of Japan finally returned to raise interest rates in line with global market expectations. On the surface, the "post-Kuroda era" policy changed course and followed the Fed again, but in fact, the top design core of Japan’s monetary policy has never changed. Once the Federal Reserve cuts interest rates, the Bank of Japan, the Japanese yen and Japanese bonds are likely to become a major source of fluctuations in the global monetary and financial markets in the future.
From the analysis of market data, there have been frequent chaos in the global currency and financial markets recently; The prices of non-interest-bearing assets have rocketed, and gold has fluctuated at a high price; Encrypted assets such as Bitcoin have been dormant for three years and then soared to historical highs again. Behind all this is the decline in the yield of interest-bearing assets relative to non-interest-bearing assets caused by the uncertainty of global monetary policy.
Under the condition that the market is so turbulent, the Bank of Japan can only try its best to maintain the stability of bond operations and prevent the Japanese yen hot money in the global financial market from using the Bank of Japan’s policy steering again for policy arbitrage. This is not only the main reason why the Bank of Japan indicated that it would make long-term efforts to maintain the balance between the volume and price of its bond purchases after it turned to raising interest rates, but also the fundamental reason why the yen exchange rate in the global market fell instead of rising.
03
Choice of the pace of Japan’s interest rate hike in the future
Chen Jia said that neither the economic base nor the superstructure in Japan has the objective conditions to tighten monetary policy quickly in the short term. Excessive interest rate hikes only increase the feasibility of international financial market arbitrageurs to increase their holdings of yen-denominated assets in the short term, which has spawned a Japanese stock market bubble. From the analysis of the benchmark of the fundamental operation of the central bank, the necessary conditions for the Bank of Japan to really have the opportunity to enter the interest rate hike channel must be based on the camera choice in the macro-economy of Japan, the return of the yield curve to normal, the expected high core inflation rate, and the majority support of opinion polls for interest rate hikes.
Gu Qinhua said that due to geopolitical reasons, Japan’s interest rate hike may have an interaction with the US interest rate cut. When the US starts to cut interest rates, Japan will raise interest rates. When the United States is not healthy, Japan will add very little or even nothing. There is no need to guess the timing of the Fed’s interest rate cut. It must be one of the following two opportunities: the first is that the inflation rate has been below 3% for many times in a row. If it is below 3%, it is still possible to revive, and it is easy to jump above 5%. The second is the financial crisis, such as bank failures and mass unemployment. The mass unemployment is due to the high cost, the business owners can’t afford to hire too many people, and they don’t have the funds to expand reproduction, so there will be a large number of layoffs, which is a sign of economic downturn. Another sign is the debt crisis, bank failures and so on. After the above situation occurs, the Fed will definitely cut interest rates.
Gu Qinhua believes that the yen’s interest rate hike will put two conditions on the United States. The first is to lift the restrictions imposed by the United States on the increase of Japanese military spending after World War II, so that it can have the ability to protect its own achievements, not just the self-defense forces, but also its own army. In the meantime, the United States should strengthen its protection and transfer of armament technology. The second condition is not to interfere too much with Japan’s foreign trade surplus. Japan should organize a new Asian trade circle excluding China, and Japan’s trade volume should be weighted and averaged throughout the new trade circle. The United States cannot count the trade volume generated by Japanese enterprises established in the United States, which mainly recruit American employees, as Japan’s total foreign trade with the United States.
Every central bank’s interest rate hike is a process of returning capital. For example, money placed in American banks has a 5% interest rate, while Japan only has a zero interest rate or even a negative interest rate. If you deposit a certain amount of money, you have to pay management fees. Everyone will definitely want to deposit money in American banks, plus the Japanese yen and the US dollar can be freely exchanged without restrictions.
The reason for currency depreciation is that it is thrown a lot. Like stocks, if someone throws it, it will fall. Therefore, the depreciation of the yen is also due to the government’s issuance of additional currency, which continues to stimulate the economy. Because the yen arbitrage transactions are frequent, for example, the "Mrs. Watanabe" group does foreign exchange transactions, people can’t let the yen stay in the process of trading forever, and it needs to be landed. It is definitely the best to land in US dollars, and the US dollar is deposited in the bank with interest. As soon as the Bank of Japan raises interest rates, the cost of borrowing will increase, and the money will naturally flow back to Japan to repay the principal and interest and feed back the suzerain country.
Dou Shaojie believes that this move of the Bank of Japan can be said to be "the first step of the Long March", that is, from the abnormal state of "different dimensions" to the normal state, but what will happen afterwards, considering the interests of all parties, especially the reality of the Japanese government, it is estimated that the Bank of Japan will not take too radical measures.
After all, the Bank of Japan has been buying Japanese government bonds through YCC for a long time. By the end of 2023, the Bank of Japan held about 53.7% of Japanese government bonds, so the biggest creditor of the Japanese government is the Bank of Japan. If you borrow money, you have to pay it back, and you need to pay interest. In 2023, the debt interest that the Japanese government needs to pay is 8.5 trillion yen, accounting for about 1.4% of Japan’s annual GDP. If the Bank of Japan continues to raise interest rates at this time, the interest expenses that the Japanese government needs to bear will increase. The Japanese government, whose finances are already tight, is even more difficult, and may even raise the consumption tax again. Therefore, the Bank of Japan will also take a very cautious attitude towards the increase of interest rates. However, it is also very difficult for the central bank. If interest rates are not raised properly, from the perspective of foreign investors, Japanese interest rates will not be raised, and the yen may depreciate further.
04
Warning and Response to China
In Gu Qinhua’s view, monetary policy has two sides, both favorable and unfavorable, and every country is trying to avoid disadvantages as much as possible.
For example, one of the benefits of cutting interest rates is that it can reduce the burden on investors and the deficits of local governments, enterprises and ordinary people, but it will also be accompanied by concerns about the outflow of money, because money is as pervasive as water and difficult to stop.
For another example, lowering the deposit reserve ratio has both advantages and disadvantages. The advantage is to release liquidity and reduce it by 0.5 percentage point, which may create the effect of 1 trillion cash. Because banks have more money, they can support more repeated loans. However, the first disadvantage is that it creates an illusion of abundant funds and rising deposit interest rates. Although it seems to improve liquidity on the surface, it makes the amount of social financing and the deposits of ordinary people rise. In fact, the money is just idling inside the bank. When idling, there will be a problem. Assets that do not create assets are liabilities. This is also a very important point in monetary finance: no matter how big or abundant an asset is, it is defined as a liability if it cannot bring benefits.
The second disadvantage of interest rate cuts is that there are many "thunderbolts" now. The deposit reserve was originally one of the important tools for the central bank to cope with the "thunderbolts" of banks. When banks fail to meet their debts, they are used to subsidize depositors. However, if the deposit reserve ratio is low, the scope of protection will be reduced. In addition, it will also make depositors worry. For example, once a large real estate company goes bankrupt, depositors of the bank with the most loans will calculate the risks and may transfer their deposits to other banks, which is also a kind of idling of funds.
The third disadvantage of interest rate reduction is that it falsely creates an increase in social financing and deposits, making it difficult for decision makers to accurately determine the market capital situation.
It is difficult to explain whether banks should raise interest rates or cut interest rates in this complex market situation. Any policy has its internal and external causes, advantages and disadvantages, and needs to be judged and selected. In Gu Qinhua’s view, foreign investors should be gathered at this time, and interest rates should not be cut sharply. Some targeted subsidies can be taken to stabilize foreign funds.
In addition, we should learn from the successful strategies of Japan, South Korea, the United States and other countries to get out of the middle-income trap and seek development in overseas markets with real opportunities. Because the middle-income trap is a hurdle that all economies have to pass in the development process. When the economy develops, people tend to expand, get into debt, artificially push up assets and create some bubbles. These bubbles are not transferred by human will, and eventually there will be a low tide "trap".
Chen Jia said that since the exchange rate reform in 2015, China’s financial system has been optimizing the governance structure of the macro-prudential supervision system, especially in the governance of cross-border financial arbitrage. Although China’s financial industry is confident to cope with the policy shock caused by the Bank of Japan’s turn, China’s financial institutions must take precautions, adhere to the principle of macro-prudence, and accelerate their business and digital transformation. Taking the Bank of Japan as a mirror, it is the advanced realm of macro-prudential supervision system to do all the concrete work to prevent and resolve systemic risks and eliminate major risks invisibly.
Source | Business School Magazine, May 2024