Japan’s deflation has come to an end, but the depreciation of the yen may not be over yet

On March 19th, the Bank of Japan decided to adopt a strategy of closing the market and increasing the strategic interest rate from -0.1% to within the range of 0 to 0.1%. This is the first time the Bank of Japan has raised interest rates since February 2007. In addition, the Bank of Japan also announced the ban on purchasing ETFs and real estate investment trusts (REITs); The strategy of banning yield curve control (YCC) will inherit the purchase of treasury bond at roughly the same amount as before.
The shopping mall is very concerned about the strategic movements of the Bank of Japan, especially the short-term strategy of closing interest rates. Will it have a negative impact on the Japanese economy? What is the impact on the global financial mall? This article will revolve around the following achievements for interpretation.

Achievement 1: Will the Bank of Japan’s closing interest rate hike have a negative impact on the Japanese economy? Will the Japanese economy fall back into deflation?
Q: We thought the effect was not significant. Before the Bank of Japan raised interest rates, the real economy had already achieved results in its attempts. According to Japanese media reports, Rengo, the largest union, has won an annual artificial increase of 5.3%, higher than the previous year’s 3.8% and the largest increase in 30 years. This achievement greatly exceeded expectations, and the evaluation suggests that the company may have suffered a higher artificial decline. Since companies can benefit from the increased and decreased rest costs, they can also benefit from the increased financing costs. Therefore, the Bank of Japan is particularly concerned about the changes in rest centers. In January, Bank of Japan Governor Kazuo Ueda exaggerated at a press conference the need to focus on the results of the March “Spring Battle” talks, stating that if it is confirmed that human intervention and inflation are achieving a virtuous cycle, they will consider shifting their easing strategies, including interest rate hikes, because higher levels of human intervention can wear off service sector inflation and increased real consumption.
From the current situation, as long as the yen does not depreciate significantly and domestic interest rates do not exceed adjustment, Japan may declare an end to deflation. However, the trend that has not yet gone is not smooth sailing, especially be careful whether the yen will depreciate after the Bank of Japan no longer purchases domestic equity assets. If the yen depreciates too quickly, it could lead to Japan’s economy falling into deflation again.
Score 2: How will the Japanese stock market and interest rates be summarized? Will the Japanese yen inherit and depreciate?
Q: I think there is a high probability that the Japanese stock market will return to normal after inheriting a period of decline. In the short term, interest rates can continue to decline, but in the long term, they will fluctuate with low economic cycles.
The main reason why the Japanese stock market has been able to decline for a long time since 2012 is that Japan implemented a quantitative easing strategy after the real estate market was cleared, and “Abenomics” has led to the continuous expansion of the total assets of the Bank of Japan. The current situation is quite similar to the situation at the end of 2017. After the Bank of Japan accelerated its property purchase rate, the Japanese yen depreciated, and the growth rate of corporate costs rapidly expanded, resulting in a stagnant stock market. At that time, we also missed the opportunity for the coin strategy to return to normal.
After 2021, the Bank of Japan’s total asset expansion rate has accelerated, but benefiting from YCC manipulation, the Japanese yen has significantly depreciated, supporting the steady increase in corporate costs and giving the stock market room for rapid decline. If Japan’s interest rates fall and the Japanese yen drops significantly, the Nikkei 225 index could peak and fall if this step is taken now. Of course, we also need to consider the situation where non manufacturing costs are still increasing rapidly among enterprise costs. After the epidemic, the Japanese financial industry has grown rapidly, and this sector of costs has offset the decline in manufacturing costs and supported the decline in the stock market.
If the Japanese economy continues to maintain a rapid growth momentum after this spring salary increase, both year-on-year CPI and interest rates can be maintained at a high level. But if the Japanese economy declines, interest rates will also fall accordingly. In principle, the Bank of Japan can either bring interest rates back to normal or convert exchange rates from depreciation to depreciation. However, excessive depreciation of the Japanese yen can lead to a decline in competitiveness and harm economic growth. Moreover, the current domestic oil price may fall again, and the expectation of interest rate cuts in Europe and America weakens, which does not support the depreciation of the Japanese yen. So we still hope to devalue the Japanese yen.
Score three: Will Japan’s interest rate hikes bring turmoil to global financial markets? Will Chinese interest rates be affected by this?
Question: We believe that the popularity of the Japanese yen in China is not significant, and it is not widely recognized as a global currency, with a relatively low proportion of reserve assets. Therefore, the rise and fall of Japanese interest rates do not affect the trends of other financial markets around the world, nor do they affect China. What investors are more helpful with is the conservative carry interest business currency of the Japanese yen. Will the increase or decrease in interest rates lead to a deterioration of the trend, which will disturb the global shopping mall.
Against the backdrop of lower interest rates in Japan, continuous depreciation of the yen, and rapid decline in US stocks in the early stages, the currency appeal of the yen’s carry interest business is relatively high. But we have observed that this scale is not large, much lower than before. The financial markets in China and Japan are not interconnected, and the scale of bond investment between the two countries is relatively small. Therefore, Chinese interest rates will not be directly affected by fluctuations in Japanese interest rates.