Tokyo FinTech Association’s Post

Bank of Japan Governor Kazuo Ueda recently emphasized the necessity of vigilance regarding economic risks without hinting at any immediate interest rate adjustments. Speaking at a business conference in Tokyo, Ueda highlighted the importance of closely observing developments in economic activity, prices, and financial conditions. His cautious stance follows recent dovish comments that caught many BOJ observers by surprise, contributing to the yen's depreciation against the dollar. The Bank of Japan has maintained its benchmark interest rate at 0.25% since December, reflecting a careful evaluation of various influencing factors. Ueda mentioned critical elements to monitor, such as upcoming annual spring wage negotiations and economic trends in the United States, underlining a prudent approach in navigating future monetary policy decisions. Insights from the IndexBox platform reveal that Japan's economic outlook is shaped by a complex array of global and domestic circumstances. The BOJ's careful assessment of these factors will be pivotal as the bank charts its monetary policy path. This balanced approach aims to mitigate risks while supporting economic stability, underscoring the importance of a strategic and measured response to unfolding economic scenarios. #EconomicOutlook #MonetaryPolicy #JapanEconomy https://lnkd.in/dxR7fnsG

Bank of Japan Working Paper: Recent Developments in Measuring the Natural Rate of Interest The natural rate of interest (r*) is the real interest rate that is neutral to the economy and prices, and is one of the benchmarks for evaluating the stance of monetary policy. r* cannot be observed directly and must be estimated based on some assumptions. In this paper, the authors survey various methods that have been developed for estimating r*, summarize their characteristics, and apply them to the Japanese economy. They confirm all estimates of r* showed a downward trend in the long run. However, the estimated results of r* vary widely, depending on the method used, and current estimates can alter when new data are added to the estimation. Therefore, it is necessary to consider estimation uncertainties when conducting monetary policy. 👉 Subscribe to our weekly LinkedIn newsletter, the "Japan FinTech Observer", here: https://lnkd.in/gNjUuSxG

🌍💼Big Global Financial Markets Update💹📈 Bank of Japan (BoJ) hikes interest rates from (-)0.1% to 0%-0.1% range. 🏦 The hike in interest rates has come after 17 years as the inflation in Japan has finally settled around the 2% level mandated by BoJ.📈 The rates in Japan have been in negative territory since 2016. The move by BoJ will have the following impacts on the Global Financial Markets: 📌 Japanese Yen (JPY) will strengthen against the US Dollar (USD) as higher interest rates will attract more inflows to Japan due to better return prospects. 📌 Carry Trade, which involves borrowing in lower-yielding currency (JPY) and investing in assets globally to make higher returns, will be significantly impacted as the borrowing cost in Japan will rise, impacting the returns of investors involved in such trade. 📌 Businesses in export-oriented companies in Japan will be impacted as the strengthening of JPY will make their products expensive as compared to earlier. 📌 The move will also impact equities in Japan, which have risen to their all-time highs first time since the late 1980s. Overall, this is a historic move by BoJ which will continue to have an impact on the Global Financial Markets in the days to come.📜🌐 Follow Nikhil Singh for more such interesting content and insights.

"Why the Bank of Japan's Interest Rate Hike Matters to Global Markets" 1)Global Influence: Japan is the world’s third-largest economy, so changes in its monetary policy can impact markets around the globe. 2)Historical Trends:  History has shown that when Japan hikes its interest rates, it often leads to market turbulence. For example, past rate hikes have contributed to economic bubbles bursting and even global financial crises. This shows just how sensitive the global market is to Japan’s economic policies. 3)Market Volatility: A rate hike can cause bond and stock markets to fluctuate, affecting everything from borrowing costs to investor confidence. 4)Currency Impacts: Changes in Japan’s interest rates can influence the yen and other major currencies, potentially leading to broader market instability. 5)Economic Ripple Effects: Japan’s economic health is tied to global supply chains and trade. If the rate hike slows Japan’s economy, it could have a knock-on effect on the global economy. 6)Investor Awareness: Investors should keep a close eye on Japan’s monetary policy and be ready to manage risks as markets react to these changes.

Cobra Effect of negative interest rates! Last Month, Japan ended the era of negative interest rates! Let's understand what they are supposed to do and what ends up happening. The Intent: Central banks implement negative interest rates to kickstart sluggish economies. The idea? Encourage banks to lend more and businesses to invest by penalizing hoarding cash. How It's Supposed to Work: With negative rates, commercial banks pay to park their excess reserves with the central bank, so they're motivated to lend. Businesses, enticed by cheap credit, are expected to invest, encouraging actual growth in the economy. Risk free rate (Lower) + Risk premium (Stays same) --> Expected return (Lower) The Twist: But here's the kicker - the "Cobra Effect". Instead of boosting investment, the moment the central bank announces negative interest rates, seeing central banks resort to such measures, corporations worry about economic health, driving up risk premiums. So, even with lower borrowing costs, the overall expected returns remain in the same ballpark. Risk-free rate (Lower) + Risk premium (Higher) --> Expected return (Stays same) - refer slide from Aswath Damodaran's presentation as an example. Global Ripples: Negative rates were also supposed to weaken currencies, boosting exports-driven investments. However, if other countries also lower the interest rates, forex markets remain stable, and the real economy will see little impact. Investment Shifts: Institutional investors, wary of negative rates' effectiveness, seek better investment opportunities abroad. Japan, for instance, witnesses a surge in investment in US treasury bonds due to low yields at home. Looking Ahead: As Japan changes its monetary policy and aims to have positive interest rates, aiming for a 2% inflation target, the influx of money into Japanese investments becomes a fascinating trend to watch. Source - Aswath Damodaran (I am extremely grateful for his free lectures on YouTube, must watch for every finance enthusiast) https://lnkd.in/dV2ezyEp https://lnkd.in/dJKUaUZN

In this week’s CIO Weekly Investment Outlook podcast, titled ‘China and Japan: on different paths’, the Private Bank’s Chief Investment Officer in APAC, Stefanie Holtze-Jen, CFDS, discusses the Federal Reserve’s pivot for a rate cut this year, and data points leading to September. For Japan, Stefanie says the Bank of Japan (BoJ) confirmed its second rate hike for this year (up from 0-0.1% to 0.25%), and also announced quantitative easing. All eyes are now on next week’s wage data, which will test repriced assumptions for BoJ’s next steps. Australia and India’s central banks are due to meet this week, and the CIO expects the RBA and RBI to hold steady this month. In China, recent data disappointments have shown continued weakness so this week’s important trade and inflation data will be even more closely monitored. Stefanie also discussed the outcome of China’s Third Plenum which committed to long-term structural changes, but continues to link these to its short-term goal of achieving 5% growth this year. For instance, by launching a 300bn RMB extended programme to encourage domestic investor trading in consumables. Tune in and listen to Stefanie’s key thoughts for the week ahead. Download and subscribe from Apple Podcasts and Spotify or listen here now: https://lnkd.in/emvemAau (When investing, your capital may be at risk) #CIOWeeklyInvestmentOutlook #privatebanking #wealthmanagement #emergingmarkets

Bank of Japan's Bold Moves: Boosting Japan's Economy Amidst Pandemic and Trade Tensions #10yeargovernmentbondyieldtarget #accommodativepolicy #BankofJapan #commercialpaper #COVID19pandemic #economicresilience. #exchangetradedfunds #globaltradetensions #inflationtarget #Japanesegovernmentbonds #marketimpact #pandemicimpact #pricestability #quantitativeeasingprogram #shortterminterestratetarget #stimulusmeasures #supplychaindisruptions #sustainedeconomicgrowth #ultraloosemonetarypolicy #yenstrength

The recent market volatility is attributed to a confluence of factors originating from both Japan and the United States. The BOJ's decision to raise interest rates and slow bond-buying efforts, alongside developments in the U.S. economy, contributed to the market turbulence. Additionally, disappointing earnings from big-tech companies have raised concerns about the sustainability of the "AI boom." These events have led to speculation about potential interest rate cuts by the U.S. Federal Reserve and have prompted a reevaluation of business strategies. Furthermore, there are accusations that the BOJ's actions were premature. These developments have led to increased uncertainty in the financial market.

"Governor Kazuo Ueda said on Friday (18 October 2024) ... Japan's economy was recovering moderately and likely to gradually accelerate underlying inflation toward the central bank's 2% target. But he warned of 'still high' uncertainty surrounding the country's recovery prospects, and stressed the need to keep a close eye out on the impact of market volatility on the economy. 'The overseas economic outlook, including that for the United States, remains uncertain, while market moves continue to be unstable,' Ueda said in a speech to a trust association meeting, read by Deputy Governor Shinichi Uchida on his behalf. 'For the time being, we must closely monitor such developments with high vigilance, and scrutinise their fallout on Japan's economic and price outlook, risks as well as the likelihood of achieving our forecasts,' he said. ... Ueda has said the BOJ will keep raising rates if inflation remains on track to sustainably hit 2% as it projects. But he has also stressed the bank will spend time gauging how global economic uncertainties affect Japan's fragile recovery." Reporting by Leika Kihara and Takahiko Wada; Editing by Clarence Fernandez and Susan Fenton, Bank of Japan Chief Warns of Unstable Markets, Global Uncertainties, 𝘙𝘦𝘶𝘵𝘦𝘳𝘴, 18 October 2024, https://lnkd.in/gU7HHyUw

Ever wonder how a small change in Japan could shake global markets? Let's break it down: -For years, Japan kept interest rates at or below 0%. -This allowed investors to borrow yen cheaply, convert to other currencies, and invest globally. -It was essentially "free money" - as long as the yen stayed weak. -But now, Japan has raised rates to combat inflation. The yen is strengthening, making those borrowed yen more expensive to repay. Result? A rush to unwind these trades, potentially destabilizing markets. My take: This situation highlights the interconnectedness of global finance. What seems like easy money often comes with hidden risks. The unwinding of the yen carry trade could lead to significant market volatility in the coming months. Remember, when something seems too good to be true in finance, it usually is. Always consider the long-term risks and potential market shifts. What do you think? Could this be the trigger for a larger market correction? Or will central banks step in to stabilize things?