The upcoming March witnessed many important moments in the Japanese capital market.
On March 19th, the Bank of Japan announced the cancellation of its negative interest rate policy and raised the benchmark interest rate from -0.1% to 0-0.1%. This is the first time the Bank of Japan has raised interest rates since 2007, marking the end of an 8-year era of negative interest rates. The Bank of Japan is also the last central bank globally to abandon negative interest rates. In addition, the Bank of Japan also announced the cancellation of the yield curve control (YCC) policy, the purchase of exchange traded funds (ETFs), and the purchase of real estate investment trusts (REITs). However, it will continue to purchase Japanese treasury bond, and the scale is basically the same as before.
At the same time, the Nikkei 225 index continued to hit new highs after breaking through the 40000 point mark in early March.
Against the backdrop of a new high in the stock market and unprecedented policy adjustments by the central bank, surveys have shown that confidence in large Japanese companies rebounded to a three-month high in March, and confidence in the service industry also rose to its highest level in seven months. This indicates that companies are becoming increasingly optimistic about the recovery of Japan, the world's fourth largest economy.
Will the Japanese economy, which has entered the post negative interest rate era, be as optimistic as expected? Chen Zilei, Vice President of the National Society of Japanese Economics and Director of the Japan Economic Research Center at Shanghai University of International Business and Economics, told First Financial News, "It is difficult to determine whether the fundamentals of the Japanese economy have completely improved. After all, the policy adjustment of the Bank of Japan is in an awkward atmosphere of 'an arrow on the string has to be launched'. After the resolution was announced, the yen continued to weaken in the foreign exchange market, and the stock market also reacted calmly. From the performance of Japan's stock market and foreign exchange market, domestic institutions and investors in Japan still have some concerns about the future of policy adjustment."
And this uncertainty
In Chen Zilei's view, the policy adjustment of the Bank of Japan this time is indeed expected. "This time, the entire public opinion, policies, and various aspects of public opinion have created an atmosphere where the Bank of Japan is' ready to raise an arrow '. Even whether large enterprises will raise salaries is tied to the decision of the central bank, resulting in large enterprises having to declare a significant salary increase and the Bank of Japan's policies having to change."
The first rate hike in 17 years marks the normalization of Japan's ultra loose monetary policy, which has been maintained for about 11 years. However, Chen Zilei believes that the biggest uncertain factor for the Bank of Japan's policy adjustment this time is whether Japan's actual economic growth rate can continue to maintain positive growth in the future.
According to data from the Japanese Cabinet Office, Japan's real gross domestic product (GDP) increased by 1.9% year-on-year in 2023, with a nominal GDP growth rate of 5.7% reflecting rising prices. However, in the third quarter of last year, after excluding price fluctuations, the actual GDP decreased by 0.5% compared to the second quarter, which is a decrease of 2.1% on an annualized basis. This is also the first negative growth in Japan's GDP growth in nearly three quarters since the fourth quarter of 2022. At that time, all parties were watching the trend of GDP in the fourth quarter (last year), and once it was negative again, it would mean that the Japanese economy would enter a technical recession. But fortunately, after correction, Japan's GDP grew by 0.1% month on month in the fourth quarter of last year, with an annual growth rate of 0.4%, barely avoiding a technical recession.
Chen Zilei told First Financial that a series of changes in Japan's economic data last year left a very uneasy factor for the market. "The biggest question currently is whether it can continue to maintain positive growth in the first quarter of this year. For example, the impact of the Neng Peninsula earthquake and the incomplete recovery of Chinese tourists visiting Japan will ultimately be reflected in GDP data. Against the background of significant policy adjustments by the Bank of Japan in the past, there have been economic recessions."
Previously, S&P Global Market Intelligence's assessment of Japan's economic situation in the first quarter of this year was not optimistic. "Under the negative impact of long-term production line shutdowns by some automakers, Japan's actual GDP in the first quarter of this year may shrink, which will continue to suppress private consumption, fixed investment, and exports."
As for whether the Bank of Japan will continue to raise interest rates in the future, and even when, Chen Zilei said that it still depends on whether there is room for interest rate hikes. "If the GDP data in the first quarter ultimately falls, will the Bank of Japan fall back to negative interest rates? Moreover, from the Bank of Japan's statement on the adjustment of the YCC, it can be seen that there are still some concerns about the Bank of Japan's regulation of long-term interest rates. The Bank of Japan's current situation is very delicate, and it can only move forward but not retreat, which is somewhat 'riding a tiger and difficult to fall off'."
At present, market participants expect the Bank of Japan to raise interest rates in July or October, but the possibility of a rate hike in October is even greater as it will give the central bank approximately six months to evaluate the impact of ending negative interest rates on prices and the economy. But there are also economists who hold different opinions, such as Frederick Neumann, Chief Asian Economist at HSBC Global Research, who believes that the biggest question is what will happen next. "The Bank of Japan is likely to find itself stuck at a 'zero interest rate level' and unable to further raise short-term interest rates significantly in the coming quarters."
Can the largest salary increase in history drive a virtuous cycle
Prior to the policy adjustment by the Bank of Japan, preliminary statistics from Rengo, the largest labor union in Japan, showed that the average salary increase rate, including basic salary and regular salary increases, was 5.28%, higher than the previous year's 3.8%, marking the largest increase in 30 years. Bank of Japan Governor Kazuo Ueda has previously stated on multiple occasions that if a virtuous cycle of wages and inflation is confirmed, he will consider changing loose policies, including negative interest rates, as higher wage levels can lead to service sector inflation and real consumption growth.
Regarding this, Chen Zilei told First Financial that the Japanese government hopes for a virtuous economic cycle, where input inflation is transmitted to enterprise salary increases, and enterprise salary increases are transmitted to household income increases. In conjunction with the government's 40000 yen tax reduction policy, an increase in household income can drive an increase in consumption. "Obviously, the government hopes to promote economic growth according to this policy logic, but it remains to be seen whether household final consumption will increase." Chen Zilei analyzed, "Moreover, the magnitude of the final salary increase for enterprises still needs to be observed. After all, the statements of enterprises in the questionnaire survey are generally positive, but it does not mean that they will ultimately implement salary increases according to the government's ideas. Especially in the summer, the salary increase for small and medium-sized enterprises is more worthy of attention. Small and medium-sized enterprises also need to observe the economic environment, expected revenue this year and last year, and other factors before deciding on the actual salary increase."
Harumi Taguchi, Chief Economist at Standard&Poor's Global Market Intelligence, believes that Japan's inflation rate may begin to fall below 2%. "If people ultimately choose to save instead of consume, wage growth may not necessarily bring strong consumer spending," according to an analysis by S&P Global Market Intelligence. "Although the central bank's decision will help improve the operation of financial markets, its impact on the real economy may be limited."
Chen Zilei also emphasized that due to the relatively weak increase in interest rates by the Bank of Japan, the impact on incentive mechanisms for deposits is limited.
Nagai Shigeto, Chief Economist of Japan at Oxford Economics, previously believed that the impact of the Bank of Japan's policy adjustments on economic growth and inflation would be relatively limited, and that changes in short-term interest rates and bank loans would not be significant.