Japan raises interest rates for the first time in 17 years! The global ＂negative interest rate era＂ has completely ended.

Cailian News on March 19th (Editor Xiaoxiang)With the Bank of Japan raising interest rates for the first time in 17 years on Tuesday, the "negative interest rate era" in the field of global monetary policy has officially come to an end …

The Bank of Japan announced in the day that it would raise the benchmark interest rate from -0.1% to 0-0.1%, which was in line with market expectations. In addition to ending negative interest rates, the Bank of Japan also announced that it would cancel the yield curve control (YCC) policy and stop buying risky assets such as exchange-traded funds (ETFs), thus officially ending the aggressive monetary easing experiment implemented by former governor Haruhiko Kuroda since 2013.

Although most economists surveyed earlier this month expected the Bank of Japan to wait until April to end the negative interest rate, in fact, the Japanese media have frequently aired the actions taken by the Bank of Japan in the past few days, and the results of last week’s "spring fight" in Japan showed that the salary increase of various industries generally exceeded expectations, which further increased the possibility of the Bank of Japan making a decision on raising interest rates at a two-day monetary policy meeting.

Today’s decision of the Bank of Japan has made it the last central bank in the world to give up negative interest rates, and ended the special era in which global policy makers tried to support economic growth through cheap money and unconventional monetary instruments in the past decade or so.

Judging from the recent environment in Japan and abroad, with the recovery of endogenous growth momentum of Japan’s economy, Japan’s domestic inflation is gradually changing from external input to a virtuous circle of wage-demand pull, and the core goal of the Bank of Japan’s continuous monetary easing is close to being realized. At the same time, the long-term monetary easing has caused the monetization of Japan’s fiscal deficit to be prominent, and the objective challenge of artificially distorted national debt prices has become increasingly prominent, and the yen exchange rate is facing more severe depreciation pressure.

All these factors have contributed to the major adjustment of the monetary policy framework of the Bank of Japan today.

However, analysts also said that although this move marks the first rate hike in Japan in 17 years, the fragile economic recovery may force the Bank of Japan to slow down when further raising borrowing costs, so in the long run, Japanese interest rates are expected to remain near zero.

The following are the main policy changes announced by the Bank of Japan’s intraday interest rate resolution:

End negative interest rate

The Bank of Japan voted 7-2 to end the negative interest rate. The Bank of Japan raised the benchmark interest rate from -0.1% to 0-0.1%, which was the first time since 2007, and the eight-year negative interest rate era officially ended. The Bank of Japan said that its main policy tool is still short-term interest rates.

The Bank of Japan previously implemented a three-tier interest rate system, which implemented a normal interest rate of 0.1% for the balance of basic accounts, a zero interest rate for macro additional accounts including statutory deposit reserve, and a negative interest rate of -0.1% for policy interest rate accounts with balances exceeding the above two parts.

The Bank of Japan predicts that a loose monetary environment will be maintained for the time being. In terms of forward-looking guidance, the Bank of Japan did not provide much information, saying that it would continue to pay attention to the development of financial and foreign exchange markets and their impact on Japan’s economic activities and prices. However, the previous promise that "additional easing measures will be taken without hesitation if necessary" has been cancelled.

Exit YCC

In this statement, the Bank of Japan no longer mentioned the 0% Japanese 10-year bond yield target, which declared that it cancelled the yield curve control policy.

The Bank of Japan believes that the quantitative and qualitative monetary easing (QQE) policy framework with yield curve control and the negative interest rate policy so far have played a role. Guided by the price stability target of 2%, the Bank of Japan will implement monetary policy moderately and guide short-term interest rates as the main policy tool from the perspective of sustainable and stable realization of the target, according to changes in economic activities, prices and financial conditions.

The Bank of Japan promised to continue to buy bonds, with the same amount as before.This measure was approved by a majority of 8-1. The Bank of Japan also said that if the long-term interest rate rises rapidly, it may increase the purchase amount of Japanese government bonds and conduct fixed-rate purchase operations. In the case of a rapid rise in yields, the Bank of Japan will respond flexibly, such as increasing the purchase of Japanese government bonds.

In fact, over the past year or so, the Bank of Japan has made many adjustments to the YCC policy, so it is not surprising that the YCC policy was completely cancelled this time.

At the beginning of YCC policy setting, the fluctuation range of 10-year treasury bond yield was strictly set to -0.1% to 0.1%. When the yield of treasury bonds hit the upper limit, it would trigger the central bank’s buying behavior. After that, the upper and lower limits of interest rate control were continuously relaxed-in December 2022, the fluctuation range of government bond yield was relaxed to -0.5% to 0.5%, and in July 2023, the "hard upper limit" was further adjusted to "soft upper limit", allowing the government bond yield to exceed 0.5%, and the central bank’s buying behavior would only be triggered when it further touched 1%.

The Bank of Japan also proposed to buy 400-550 billion yen of 5-10-year government bonds four times in April.

Earlier, the Japanese media reported that the Bank of Japan is studying a new quantitative financial policy framework to announce the purchase scale of future government bonds in advance, in order to prepare for the normalization of monetary policy. According to the new guidelines, the Bank of Japan will significantly reduce the upper limit of the number of bonds it plans to purchase in each bond purchase operation.

End ETF purchase

The Bank of Japan also announced the cancellation of the purchase of ETFs and the cancellation of the purchase of real estate investment trusts (J-REITs). The Bank of Japan will gradually reduce the purchase of commercial paper and corporate bonds, and stop buying in a year or so.

This is also one of the three combination punches of the Bank of Japan’s tightening transformation that the Japanese media had previously reported. At present, the dividends and profits earned by these investments have accounted for a large part of the central bank’s income. It is widely expected that the Bank of Japan will stop buying ETFs, and then start a long-term and gradual selling in several years or decades.

As part of the monetary easing policy, the Bank of Japan began to buy Japanese ETF in December 2010, when the Nikkei 225 index was only about 10,000 points.

Last month, the market value of these assets held by the Bank of Japan reached about 70 trillion yen, almost equal to the national tax revenue, equivalent to holding about 7% of the shares in the Japanese stock market, and has long been the largest shareholder in the Japanese market.

Where is Japan’s financial market going?

After the Bank of Japan announced the end of negative interest rates, withdrawal from YCC and other tight monetary policies in a few days, Japan’s financial market also fell into violent turmoil today. The Nikkei 225 index experienced several roller coaster rides in the afternoon. As of press time, the index rose by about 0.13%.

Although the Bank of Japan’s tightening action is not hawkish, the USD/JPY still experienced a "selling expectation and buying fact" during the day, with the latest trading near 149.76.

Some analysts said that the dollar/yen exchange rate may have digested the factors that the Bank of Japan will withdraw from the negative interest rate policy, butGiven that Bank of Japan Governor Kazuo Ueda will hold a press conference in a few hours, the yen exchange rate may continue to fluctuate.Although tightening policy is ostensibly hawkish, the Bank of Japan’s statement also contains a lot of dove warnings.

In the long run, there is no doubt that with the official interest rate hike by the Bank of Japan, the current pattern of Japanese capital market will be greatly changed.Previously, the Nikkei 225 index just broke through a record high of 40,000 points during the year, driven by factors such as the weakening yen benefiting domestic exporters, but the gains of Japanese stocks have been somewhat stagnant recently. Although the recent break has not stopped the enthusiasm of investors, they are now paying more attention to the choice of individual stocks.

Guojin Securities said in the research report last weekend that the withdrawal of the ultra-loose policy seems to have a certain negative impact on Japanese stocks from the denominator and the numerator. First, the withdrawal of "negative interest rate" may bring the interest rate of Japanese bonds up, which will be negative for Japanese stocks from the denominator. Second, 42% of Japanese stocks’ revenue is from overseas, and the "ultra-loose policy" adjusts or drives the appreciation of the yen, which in turn impacts the profits of Japanese stocks. Third, the net export in the early stage is an important support for Japan’s economy, and the withdrawal of the "ultra-loose policy" may also affect the quality of Japan’s economic recovery.

Of course, there are also many people in the industry who are still optimistic about the prospects of Japanese stocks. Yue Bamba, head of active investment in BlackRock Japan, said earlier, "This is a major event." He predicted that the Bank of Japan will raise interest rates gradually, and the monetary environment will remain loose and support the stock market. Bamba pointed out that "the driving force for the rise of Japanese stocks is diverse, extensive and lasting. I think there is still a long way to go before the price is fully reflected. "

Historically, according to CICC’s statistics, since 2000, the Bank of Japan has raised interest rates twice in 2000 and 2006-2007, and adjusted the YCC ceiling in 2022-2023. The historical experience of the above-mentioned policy tightening and Japan’s asset performance-Japan’s short-term debt interest rate rose slightly during the interest rate hike cycle, the long-term debt interest rate was limited by interest rate hike but usually rose before the YCC ceiling adjustment, Japanese stocks were under short-term pressure, and the yen appreciated in the short term but the long-term trend depended on the spread.

Impact of Japan’s interest rate hike on global assets

Since 2021, in order to cope with the high inflation caused by currency overshoot and supply chain shock during the pandemic, major overseas economies, such as the United States, have tightened monetary policy and started a fast-paced and substantial interest rate hike cycle. Different from other economies, the Bank of Japan has maintained a loose monetary policy for many years, anchoring the policy interest rate at the expansion level of -0.1% for a long time, becoming one of the only remaining "interest rate depressions" in the world.

Zheshang Gushou said in a recent research report that in this context, the Bank of Japan’s monetary policy choice will have a strong signal effect. The latest move by the Bank of Japan may mean the complete end of the global low interest rate environment, and the world may enter a new period in which high interest rates and high inflation coexist. With the general increase of the global broad-spectrum interest rate system, the risk-free interest rate, as the core of the financial asset valuation system, may face a certain degree of upward revision pressure, which will make large-scale assets face the risk of valuation revaluation.

It is worth mentioning that at present, Japan is still the largest overseas holder of US Treasury bonds. By the end of last year, Japan’s total overseas securities investment was equivalent to $4.2 trillion, a large part of which came from Japanese pension funds and insurance companies. In the past year, people in the industry have been worried that the normalization of the Bank of Japan’s monetary policy may lead to a large number of Japanese funds flowing back to Japan from the global market.

However, at least for the moment, investors may not have to worry too much about the impact of the Bank of Japan’s tightening policy on global capital flows. As the Bank of Japan’s tightening policy is expected to be gradual, and the overall spread between domestic and overseas markets is still huge, a large number of Japanese funds will remain in overseas markets at least in the short term.

Of the 273 respondents surveyed last week, only about 40% said that the Bank of Japan’s first rate hike since 2007 would prompt Japanese investors to sell overseas assets and repatriate the proceeds. They believe that after the "limited increase" of the Bank of Japan’s policy interest rate, Japan and other major economies still maintain a large yield gap, which is not enough to prompt Japanese investors to take change actions.

Hideo Shimomura, senior portfolio manager of Fivestar Asset Management Co, said, "We have seen a large number of Japanese retail investors outflow into foreign bonds and stocks before, and I don’t think the end of the negative interest rate policy of the Bank of Japan will change this trend."