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The Federal Reserve is expected to start cutting interest rates in June this year, and the Bank of Japan is very likely to start raising interest rates.
Why is there a 20-year era of zero interest rates in Japan? This has some connection with the claim on the Internet that Japan has lost thirty years.
Since the 90s of the 20th century, the Bank of Japan has been implementing a "zero interest rate" monetary policy for a long time. Deflation makes the exchange rate of the yen against other currencies form a long-term appreciation expectation under the purchasing power parity theory, and investors holding the yen are less affected by the risk of **, which is conducive to improving the appreciation expectation of the yen. At the same time, the deflationary environment has led to higher real interest rates, limiting private investment spending, and zero interest rates have become an option to boost the economy.
There is less land and more people in Japan, and the biggest benefit of zero interest rate is that Japan's real estate has remained stable. To put it mildly, a zero-interest policy means that the cost of borrowing is almost zero, which is a huge boon for home buyers. Let's say that Xiao Ming intends to buy a house worth 10 million yen, and he needs to take out a loan of 8 million yen. Under the zero interest rate policy, Xiao Ming can enjoy extremely low loan interest, which means that he needs to repay a relatively low loan amount every month, reducing financial pressure.
But the disadvantages of 0 interest rates are also very obvious, and long-term low interest rates may lead to excessive housing prices and the formation of bubbles. Once the bubble bursts, it will have a huge impact on home buyers and the entire economic system.
Japan's interest rate hike may be coming?
The world's major economies, including Europe and the United States, have already raised interest rates several times, and Japan, as one of the developed countries, if it continues to maintain a low interest rate policy, it may lead to a widening of interest rate differentials with other countries, which in turn will trigger a rapid depreciation of the yen.
Japan is a country without sovereignty, and to put it bluntly, it is a small henchman behind the United States. The Federal Reserve has been thinking about cutting interest rates recently, and the Bank of Japan is planning to raise interest rates.
The Fed's interest rate cuts are usually a response to an economic slowdown or a liquidity crisis in the market. When the Fed cuts interest rates, borrowing costs in the U.S. fall, which could have an impact on global capital flows as investors seek higher-yielding investment locations. In this case, if the Bank of Japan chooses to raise interest rates, it may be to balance domestic economic conditions, such as controlling inflation or stabilizing the value of the currency. For example, imported inflationary pressures in Japan are partly due to the depreciation of the yen due to the Federal Reserve's successive aggressive interest rate hikes.
The Bank of Japan's interest rate hike could cause investors to withdraw their money from overseas, especially from the U.S. bond market, as investors may seek higher yields. This repatriation could reduce liquidity in global markets, particularly in the Treasury market, and could lead to higher interest rates and bonds***
If the Bank of Japan (BOJ) raises interest rates more than the market expects, it could be seen as a "grey rhinoceros" event, a widely overlooked risk with significant potential implications. Such shocks could ripple through global financial markets, including **, bond and currency markets.
What you need to understand is that if JGBs become "bad debts", i.e., there is a large-scale default or a significant depreciation in value, this could indeed cause panic in financial markets. Countries that rely on yen loans could be hit hard. A decline in the value of the yen increases their debt burden and can lead to capital outflows, triggering currency depreciation and financial market instability.
In such a situation, Japan's domestic chaebols may accelerate the sell-off of government bonds in order to avoid risks and seek higher returns. This will further exacerbate the volatility in the Treasury market, creating a vicious circle.