The Plaza Accord 40 years ago was one of the main reasons for the depreciation of the dollar and the asset bubble in Japan. At that time, the dollar depreciated sharply while the yen appreciated sharply, leading to the formation of an asset bubble in Japan. The bubble eventually burst, leading to a 30-year economic downturn.
The signing of the Plaza Accord led to a sharp depreciation of the dollar and a sharp appreciation of the yen, a change in monetary policy that triggered sharp fluctuations in the Japanese economy. As a result of the appreciation of the yen, various types of assets** have skyrocketed, and an unprecedented asset bubble has emerged. People are investing in real estate, ** and other assets like crazy, causing bubbles to form. However, the bursting of the bubble was inevitable, and a 30-year economic downturn ensued. The painful lessons of this incident have made people realize that the stability of monetary policy is crucial, and it has also put the Bank of Japan in a dilemma.
Today, the Bank of Japan faces a difficult decision: whether to exit its accommodative policy or continue with negative interest rates. This option would be difficult for Japan, as an exit from accommodative policy could trigger a new round of asset bubbles and potentially lead to a new economic downturn.
For the Bank of Japan, there are certain risks and uncertainties in the exit of easing policy and the continuation of negative interest rate policy. Exiting accommodative policies could lead to asset destabilization and economic instability, while continued negative interest rates could exacerbate financial risks and inequality. Central banks need to make trade-offs between these dilemmas and seek a balanced solution to ensure the continued development of the economy.
Previously, the Bank of Japan had signaled that it was abandoning yield curve control, but eventually changed its mind. The Bank of Japan has now announced that it will exit its negative interest rate policy next year, which means that the negative interest rate and easing policy that has lasted for more than a decade will come to an end.
The signal of the change in the expansion of the Bank of Japan has sparked concern and speculation in the market. The previous statement of abandoning yield curve control was interpreted as a possible adjustment of the direction of monetary policy, but in the end, the central bank made a different decision. This decision will undoubtedly have a significant impact on the market, and it can be expected that with the exit of negative interest rates and easing policies, the market will usher in a new weather vane, and the economic and financial environment will change accordingly.
In fact, there are a number of reasons why Japan is reluctant to exit easing. First of all, Europe and the United States are now turning to easing, and the exit of easing may lead to a narrowing of interest rate differentials with the dollar, which in turn will trigger a new round of yen appreciation and dollar depreciation. This could be a disadvantage for Japan.
At present, easing policy on a global scale is becoming the new normal. The Fed is already expected to end its rate hike cycle and possibly even cut rates next year. At the same time, the ECB also intends to cut interest rates by 50 basis points next year to stimulate the European economy. In this case, if Japan withdraws from its easing policy, it may quickly narrow the interest rate differential with the U.S. dollar, leading to a depreciation of the U.S. dollar and an appreciation of the yen. While this may keep Japan in a good position ahead of India, it is not necessarily the outcome that the BoJ is hoping for.
Another question that plagues the Bank of Japan is whether inflation has reached its targetAlthough Japan's consumer price index (CPI) has hit a 30-year high, with an average target of more than 2%, against the backdrop of global inflation, inflation may fall back below 3% or even lower next year even if Japan does not exit the negative interest rate policy, which temporarily exits the deflationary situation does not guarantee that it will not enter deflation again.
The Bank of Japan has been aiming to keep inflation above 2%, and now data shows that Japan's consumer price index has surpassed that target and reached a new high. However, given the persistence of inflationary pressures globally, inflation could fall back below 3% or even lower next year, even if Japan continues to pursue a negative interest rate policy. This means that the possibility of Japan falling into deflation again still exists, and the central bank needs to pay close attention to the performance of economic data, as well as changes in the global economic environment, in order to formulate appropriate monetary policy measures.
Although Japan is facing pressure on the exchange rate, it is not uncommon for the yen to trade below 150 against the dollar in the long term. As a result of the depreciation of the yen in recent years, Japan's GDP has been surpassed by Germany when converted into dollars, ahead of India. But if the yen appreciates sharply against the dollar, there is much less risk that Japan will be overtaken by India.
Although the exchange rate is an important factor for Japan, a review of history shows that exchange rates below 150 are nothing new for Japan. Before the Plaza Accord was signed, such an exchange rate was even the norm. Although Japan's GDP was surpassed by Germany when converted into dollars, this does not represent a decline in Japan's economic power. Conversely, if the yen appreciates sharply against the dollar, the risk of Japan being overtaken by India will be greatly reduced. In addition, the appreciation of the yen is also conducive to reducing the cost of imports, which will bring certain benefits to Japan's economic development.
Finally, the most serious problem facing Japan is debt. While we often focus on the high level of debt in the US debt of $340 trillion, Japan's debt problem is more serious than its GDP. The long-term low interest rate policy in the past has made the interest expense of Japanese debt relatively low, however, once the interest rate is raised, Japan** will face a large interest expense, which may lead to a more serious debt problem.
Japan's debt problem has been the focus of close attention among economists and policymakers. Although we often refer to the debt problem of the United States, Japan's debt problem is much worse than that of GDP. Japan's long-standing low interest rate policy has made Japan's debt interest expense relatively low, but once the interest rate is raised, Japan** will immediately face a huge interest expense, which makes the debt problem a huge challenge. ** Corresponding measures need to be taken to ensure the sustainability of the debt problem and to implement sound fiscal policies to reduce fiscal pressures.
Overall, the BOJ faces the dilemma of opting out of accommodative policy or continuing with negative interest rates. Exiting easing could lead to a new round of asset bubbles and economic downturns, while continuing negative interest rates would be challenged by inflation, exchange rate pressures, and debt issues. Central banks need to weigh the pros and cons and find balanced solutions to ensure the stability of the economy. Despite the current changes in easing and monetary conditions around the world, the Bank of Japan still needs to make prudent decisions and make timely adjustments based on economic data and market conditions.