Japan's interest rate hike has broken itself

Recently, the depreciation of the yen has been on the hot search, and many people use slightly mocking words such as "collapsed" to describe it as if the Bank of Japan is stupid and piggy, and it has not saved the yen by raising interest rates.

As everyone knows, the Bank of Japan is "hesitating" for Japanese businesses and residents by exchanging the depreciation of the yen for a definitive economic recovery!

It is worth thinking about and learning.

Recently, the US dollar once broke through 152 against the yen and continued to run wild on the road of depreciation.

This also alarmed Japan's top brass, with Japan's finance minister warning that "the authorities may take 'decisive measures'." "Just like us in the past few years, we rely on the loudspeaker to tell the market: I will intervene at any time, and I will bear the consequences of shorting.

It stands to reason that when a country's central bank raises interest rates, its currency should appreciate due to the narrowing of interest rate differentials, so why did Japan's first interest rate hike in more than a decade bring the opposite result?

The reason is that the Bank of Japan left a hand - to continue to buy government bonds, which exposes the "hesitation" and "uncertainty" of the Bank of Japan!!

Although he raised the short-term interest rate from minus 0.1% to 0~0.1% and canceled the YCC, it looks like a rate hike. But his operation was expected by the market for a long time.

The only thing the market did not expect was that Japan would continue to buy government bonds to drive down Japan's long-term interest rates.

This means that Japan's "interest rate hike is equivalent to no interest rate hike".

To understand the meaning of this sentence, two prerequisites need to be understood:

Premise 1: The impact of long-term interest rates on the real economy is the most obvious.

For example, the annualized interest rate of bank loans for 3 months is 10%, which is very high, but as long as the annualized interest rate of 5-year and 10-year loans is not high, the impact on enterprises and residents in the real economy will not be so great.

Premise 2: Usually, the central bank manipulates interest rates by fiddling with short-term interest rates and relying on market arbitrage mechanisms to influence long-term interest rates.

It's a bit like we shake the rope and make waves. One side of the rope is the short-term interest rate, the other end of the rope is the long-term interest rate, and the arbitrage mechanism of the market is a mechanical vibration.

If the central bank presses the other end of the rope (buying Treasury bonds to drive down long-term interest rates) with a big stone, then no matter how hard he shakes (raising interest rates) at one end, the effect will be greatly reduced.

The yen continued to depreciate, and it was precisely because the Bank of Japan did not shake the rope vigorously and pressed the other end of the rope vigorously that the market smelled the "ultra-dovish" smell of the Bank of Japan.

Just like in 2022, when the United States just started to raise interest rates, the market thinks that you can't "get hard" at all, so don't be afraid of you, continue to trade according to the loose monetary policy idea, stocks should continue to go long, and the yen should be short and continue to short.

Could it be that if the Bank of Japan does not know that if it is not hawkish, the yen will weaken?

Know!

Know, why do you still do it?

Some people say that the Bank of Japan does not dare to be so hawkish because it is worried about the sword of Damocles on the head of Japan's finances.

Their logic is that if the Bank of Japan raises interest rates too much, the sky-high amount of government bonds (250% of GDP) will have to pay a lot of interest, which will be a headache for the Japanese treasury sector, and the Japanese government bonds will collapse. If Japan's national debt collapses and the fiscal sector has a headache and reduces spending, it is possible that Japan's economy, which has just improved, will be knocked back to its original shape.

In short, yes

There can only be one normalization of the Japanese treasury and the Bank of Japan?!

This logic sounds plausible, but I beg to differ.

It would be a big mistake to think that if the Bank of Japan does not raise interest rates, Japanese government bonds will be fine.

Since October 2022, there have been not many people playing in the Japanese government bond market, and sometimes only the Bank of Japan itself is playing for a day. Capital votes with its feet according to the logic of marketization, but you just lose money and flip the table, who dares to play with you?!

There is no liquid market, there is no real price, and this is called collapse.

The Bank of Japan does not dare to be hawkish, and deliberately lowers the long-term lending rate, precisely because it is worried about whether the real economy has really recovered and really come out of deflation.

To put it bluntly

The depreciation of the yen is an economic recovery in which Japan is trading a reduction in the credibility of the government (Japanese government bonds) for certainty, and it is "hesitating" for Japanese businesses and residents!

This can be felt in a sentence repeated many times by Bank of Japan Governor Kazuo Ueda before the rate hike, who said: "(The reason why we are hesitant about raising interest rates), we have been waiting and expecting to see the inflation ...... driven by rising wages"

From this, we can see that the top priority of the Bank of Japan is not whether the yen will depreciate or not, but how the Japanese real economy will recover.

On the other hand, the renminbi is also depreciating, but what we lack is a kind of policy prudence, and what we lack is the resoluteness to consider the problem from the perspective of economy and welfare.

Interest rate differentials shake the exchange rate, and the economy determines the exchange rate.

Of course, the deliberate depreciation of the yen cannot be sustained forever.

On the contrary, if the yen depreciates very sharply, then Japan's second larger-than-expected interest rate hike of the year will soon come, and it will have to be guarded against.

Why?

If the yen continues to depreciate, the price of goods imported into Japan will become more expensive, and the transmission to Japan will contribute to inflation in Japan.

Originally, the key to Japan's interest rate hike this year was that the Bank of Japan noticed that wages in Japan had risen, and that the increase was even greater than last year's - the domestic population has already received the signal of inflation.

If the yen continues to depreciate, even if commodity prices do not rise much, the prices of goods entering Japan will actually rise, and imported inflationary pressures similar to those seen in 2022 will still return.

This will take inflation in Japan to the next level.

At that time, Japan will simply not be able to ignore him, and the market will feel weak - a measure that will be more drastic than the first rate hike will appear.

Now the market has given three scenarios for Japan's interest rate hike again:

Scenario 1: See if inflation will get out of control and continue to rise, and wait until October, when the Fed's action signal to cut interest rates is clearer, and then decide whether to continue to raise interest rates.

Scenario 2: The depreciation of the yen has contributed to Japan's inflation, and inflation has exceeded expectations, so Japan will start a second round of interest rate hikes in July.

Scenario 3: The account has finally risen, and it can't be extinguished at will, intervening in the yen with one hand, and continuing to maintain easing with the other hand (the "eagle" can't get up), and wait for another wave of interest rate hikes in 2025.

At present, the likelihood of the above three scenarios occurring is decreasing in turn.

The biggest variable affecting the likelihood is the yen exchange rate.

If the Bank of Japan does not act in July, but acts again in October, then Japan's second round of interest rate hikes will only be greater.

The first time it didn't make the world tremble, the second time it won't be guaranteed!

What is the real reaction of the local market after Japan's interest rate hike? What will happen to the yen? Will Japan's housing prices and stock market continue to rise? How will Japan rise step by step from the lost 30 years? How will Japan's declining population affect the economy?