As the Bank of Japan is expected to end its negative interest rate policy since 2016 this week, an extended question is undoubtedly: Will its actions trigger a new round of global funding "shock waves"?
Don't forget, currently Japanese investors hold foreign securities worth up to $4.43 trillion. In the past year, some industry insiders have been concerned that the normalization process of the Bank of Japan's monetary policy may lead to a large amount of Japanese funds flowing back from the global market to Japan.
However, according to the latest industry survey conducted last week, investors may not need to worry too much about this at the moment - the survey shows that due to the expected gradual pace of tightening policies by the Bank of Japan, while the overall interest rate spread in domestic and foreign markets remains huge, a large amount of Japanese capital is expected to continue to stay in overseas markets.
Out of the 273 respondents surveyed in this survey, only about 40% stated that the Bank of Japan's first interest rate hike since 2007 will encourage investors in the country to sell overseas assets and repatriate profits. They believe that after the limited increase in the Bank of Japan's policy interest rates, Japan still maintains a large yield gap with other major economies, which is not enough to prompt Japanese investors to take transformative actions.
This survey result may alleviate concerns about the historic policy shift of the Bank of Japan, which will have a profound impact on global asset prices.
This is also obviously good news for the US stock market and bond market - at present, Japan is still the largest overseas "creditor" of US treasury bond bonds.
Members of the Bank of Japan's board of directors will discuss whether to abolish the only remaining negative interest rate policy globally during a two-day meeting that ends on March 19th. Last Friday's overnight index swap trading showed a probability of approximately 67% of canceling the negative interest rate policy.
Hideo Shimomura, senior portfolio manager of Fivestar Asset Management Co., said, "We have seen a large number of Japanese retail investors' funds outflow into foreign bonds and stocks before, and I don't think the end of the Bank of Japan's negative interest rate policy will change this trend."
Over the past decade, a large amount of Japanese funds have flowed to the United States and tax havens represented by the Cayman Islands in search of higher returns.
Data shows that Japanese investors still bought foreign bonds worth 3.5 trillion yen in the first two months of this year, even as speculation about the policy shift of the Bank of Japan continued to rise. Previously, they had just purchased 18.9 trillion yen of foreign bonds in 2023- the largest amount in three years.
Japan's degree of austerity still differs from the mainstream global trend
A survey shows that 73% of respondents expect the Bank of Japan to raise short-term interest rates from the current negative 0.1% to between 0.01% and 0.5% by the end of this year.
However, overnight index swaps show that even if the Bank of Japan can raise its policy rate to 0.5% by the end of this year, it may still be about 400 basis points lower than similar rates in the United States, which is not good news for the yen exchange rate.
Due to the active tightening of policies by major central banks outside of Japan in the past few years to curb high inflation, the yen/dollar exchange rate has fallen by about 10% in the past year, with the largest decline among the 16 major currencies tracked in the industry. Meanwhile, Bank of Japan officials are still waiting for clear signs that the country's inflation rate can remain at 2% or above, supported by wage increases.
In the latest survey, 69% of people believe that the exchange rate between the US dollar and the Japanese yen may fall between 120 and 140 by the end of this year, which is about 149% of the latest report. Foreign exchange strategists predict that the rebound of the yen this year may be limited to just a few percentage points.
Alan Ruskin, Chief International Strategist at Deutsche Bank, pointed out that "any tightening news with positive signals that stimulates the rise of the yen could quickly reverse."
If the upward space of the Japanese yen is limited, it is expected to have a positive impact on the Japanese stock market. The respondents who participated in the survey also have relatively optimistic views on the Japanese stock market as a whole, with 45% of them believing that the Japanese stock market is still structurally cheap.
Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank in Tokyo, said, "The Japanese stock market may decline, but I don't think that means we will enter a downward trend. If the US dollar/yen exchange rate drops sharply to around 120, the stock price will indeed be affected, but this possibility is not significant."