During the period before lunch next Tuesday Beijing time, there is a high probability that the global capital markets will usher in a historic milestone - the Bank of Japan raising interest rates for the first time since February 2007 and withdrawing from the negative interest rate policy implemented since February 2016.
As the signal of the Bank of Japan's historic interest rate hike becomes increasingly clear, the international market will shift its focus from "whether to raise interest rates" to "the impact after the hike" in this stormy weekend.
Exit negative interest rates, abolish YCC, and stop buying stocks
This week, the results of the spring negotiations between labor and management in Japan, known as the "Spring Battle," have been released. Large enterprises such as Toyota, Nissan, Mitsubishi, and Toshiba have all fully accepted the union's demands for wage and bonus increases, and some industry giants have even offered wage increases that exceed the union's demands.
According to the initial 2024 statistics released by the Japan Federation of Labor Organizations (Rengo) on Friday, the average increase in wage negotiations this year was 5.28%, the largest increase in the past 33 years, far higher than last year's 3.8%. The most concerning small business in the market has also seen a salary increase of 4.42%.
With the release of this number, the final obstacle to the Bank of Japan's interest rate hike has also been cleared. The tone of the Japanese media's report on the central bank has also changed from "considering interest rate hikes" to basic affirmation.
According to a report by Nikkei Shimbun on Saturday morning, the Bank of Japan believes that with large enterprises and unions negotiating to implement a significant salary increase this year, inflation is expected to remain at 2% or higher, providing an opportunity for the central bank to take monetary policy normalization measures. In anticipation of adjusting monetary policy next week, the Bank of Japan has initiated internal and external coordination work on Friday.
At present, the main work plan of the Bank of Japan is to increase the policy interest rate of -0.1% by more than 0.1 percentage points and guide short-term interest rates to the range of 0-0.1%.
According to sources close to the Bank of Japan, this year's wage increase has reached a level where even cautious reflationists can readily accept policy changes.
It is reported that next Tuesday, in addition to the withdrawal of the Bank of Japan's negative interest rate policy, the yield curve control policy (Japanese treasury bond) that has been changed and changed will also be completely ended. At the same time, the Bank of Japan will also stop continuing to purchase stock ETFs and real estate investment trusts. However, in order to maintain market stability, the Bank of Japan will also maintain its loose policy and continue to purchase government bonds when needed.
International banks are busy betting
It is obvious that as the Bank of Japan takes the first step in raising interest rates, global financial markets will enter an "unprecedented path": the US Japan exchange rate has depreciated from 110+at the end of 2021 to 150. What should be done next? Starting from the late 1990s, the yen carry trading strategy commonly used by global financial giants will also face variables.
At this critical moment, many international giants have already sat at the gambling table and started throwing chips into this once-in-decades situation.
Firstly, there are Japanese stocks. Yue Bamba, head of the active investment department at Blackstone Japan, stated that the Bank of Japan's interest rate hike will be a gradual and maintaining loose monetary conditions, so it will continue to support the stock market. There are various factors driving the growth of the Japanese stock market now, so there is still a long way to go before this round of gains is fully priced.
Michiko Sakai, a fund manager at Morgan Asset Management (Tokyo), stated that due to factors such as higher risk appetite and recent corporate governance reforms, the bank currently holds higher positions in insurance companies than banks. However, if the Bank of Japan continues to raise interest rates while maintaining stable economic growth, the banking industry is likely to experience quite positive development.
It should be noted that unlike the recent violent rate hikes by the Federal Reserve, overnight index swaps show that Japan's policy interest rate is expected to rise to 0.25% by the end of this year. Therefore, it is unlikely that there will be a sudden change in the state of the financial market within just six months.
In contrast to stocks, Japanese treasury bond are in a bearish position - with the central bank raising interest rates, the yield of treasury bond rises at the same time, which also means that bond trading prices will decline. UBS and Schroeder have long been involved in short selling of Japanese bonds. RBC BlueBay is betting that the yield of Japanese 10-year treasury bond bonds will rise to 1.25% by the end of the year.
Similarly, due to the approaching interest rate reduction cycles in both the United States and the Eurozone, the slowly rising yen has also led the market to generally be optimistic about a rise in the yen exchange rate.
Aaron Rock, head of nominal interest rates at Abrdn, interpreted that tightening monetary policy is expected to usher in a period of strong yen, with the currency expected to appreciate by 8% to 10% against other major currencies in the next year. Abrdn currently holds a bullish position in the Japanese yen (against the pound and euro). Schroder and JPMorgan have similar arrangements.