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

"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.

Japan's financial landscape is experiencing a pivotal shift as the 40-year government bond yield hits a record high, driven by a global bond selloff and anticipation surrounding the Bank of Japan’s monetary policy decisions. Recently, the yield surged by 3 basis points to 2.755%, a level not seen since 2007 when these bonds were first introduced. This trend also paralleled the climb of Japan’s 20-year yield, marking its highest rate since May 2011. The rise comes on the heels of a public holiday, adding more dynamism to the market's ongoing activities. IndexBox data underscores that this rise in Japan is part of a broader global trend where yields are climbing, influenced heavily by inflationary pressures and widening fiscal deficits. Across the globe, particularly in the United States, robust economic data has shifted traders’ outlooks, resulting in tempered expectations for rate cuts by the Federal Reserve. In Japan, financial circles remain abuzz with the potential for an interest rate increase by the Bank of Japan. The central bank's Governor, Kazuo Ueda, has alluded to such a possibility, contingent on sustained economic improvement. However, without a definitive timeline, the market is rife with speculation and anticipation, contributing to the current yield movements. The developments in Japan's bond market are a testament to the interconnectedness of global financial systems, where actions in one major economy can ripple across the globe. As markets adjust to new realities, investors will need to navigate a complex interplay of domestic and international economic factors. Stay informed by following how these evolving economic dynamics play a crucial role in shaping future financial strategies and opportunities worldwide. #JapanEconomy #BondMarket #FinancialTrends https://lnkd.in/dFwTrhnF

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

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?

The yen is weakening significantly and I think investors underestimate the impact on other countries across the region. The Bank of Japan shouldn’t mind the weakness – they’re happy to import some inflation given they have undershot their target for decades, and it also improves trade competitiveness. Of course, the Ministry of Finance is ready to intervene if the devaluation becomes unruly, but a steady weakening is perfectly fine. But it’s giving other central banks across the region a headache. Do they allow their currency to also depreciate so they don’t lose competitiveness to Japan? But that could lead to capital outflows and imported inflation, something countries outside of Japan are very wary about. This delicate balancing act means countries are facing a dual economic headwind. China is a good example – driven by yen weakness, the renminbi is appreciating on a trade weighted basis, negatively impacting China’s key export growth channel. But policymakers are unwilling to loosen monetary policy for fear of encouraging capital outflows and excessive currency weakness. Indeed, the central bank has suggested that bond yields should be higher, not lower. This is a difficult situation for a country working through structural economic shifts and very low inflation. There have also been hawkish shifts elsewhere including Indonesia and Australia. What would alleviate this problem and make me more constructive about economic growth and currency strength across the region? It’s all about the Bank of Japan tightening policy (perhaps on 31 July) and the Fed cutting policy (18 September?). For professional investors only. Capital at risk. Chart source is Eikon as at 2 July 2024.

"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

Morning Minute 27/09: Ishiba set to be new Japanese PM Headlines: The ruling Liberal Democratic Party elected Shigeru Ishiba as its next leader, all but guaranteeing that he will become the next Prime Minister when parliament votes on the appointment on 1st October. French and Spanish inflation sank well below 2% in September, fuelling speculation that the European Central Bank (ECB) will cut rates quicker | Consumer prices in France rose 1.5%, with the drop mainly down to lower energy costs. China's central bank on Friday lowered interest rates and injected liquidity into the banking system as Beijing assembled a last-ditch stimulus assault to pull economic growth back towards this year's roughly 5% target. Emerging Markets: The Bank of Mexico lowered its benchmark interest rate by 25 basis points to 10.50% on Thursday, the second straight cut as price pressures have been easing in the country. Zambia’s annual rate of inflation hit the highest level since December 2021 this month, rising 15.6% compared to the previous month | The gloomy data was compounded with the news that the economy grew at the slowest pace in four years, at 1.7% in the second quarter, compared to 2.2% in the first quarter. Sri Lanka's central bank kept interest rates unchanged at 8.25% for the Standing Deposit Facility on Friday in line with expectations, citing domestic and global uncertainties, but said inflation was likely to remain low and the economy was doing much better than initially expected.   -------------------------------------------------   Information contained in this publication is compiled from industry sources which we consider to be accurate and reliable at the time of publication. The information provided does not constitute advice and it should not be relied on as such. Crown Agents Bank Ltd accept no liability for the impact of any decisions made based on the information provided in this publication