Status: 12/20/2022 5:40 p.m
Japan has maintained an easy monetary policy for over two decades. But now the central bank announced that it would allow higher interest rates for long-dated bonds – an earthquake for the Asian markets.
“Nachtigall, I hear you trapping” is a German saying: Small steps create great foreboding. At least that’s how many financial experts see today’s decision by Japan’s central bank, the Bank of Japan, to allow higher interest rates for long-term bonds.
While this return was previously minus 0.25 to plus 0.25 percent, it is now being extended to minus 0.5 percent to plus 0.5 percent. The Japanese central bank is thus pursuing a restrictive monetary policy for the first time in 20 years, trying to make money more expensive, says Edgar Walk from Bankhaus Metzler ARD stock exchange studio. “Of course it’s a shock, a surprise!”
Inflation in Japan only at four percent
For a long time, the Japanese central bank acted as a bastion against rising interest rates – even after the turnaround in interest rates in the USA and Europe. As the only major central bank in the world, it has so far stuck to its ultra-loose monetary policy. And even after the decision, the Bank of Japan apparently doesn’t want to hear about a trend reversal.
“It’s intervening in this 10-year government bond market and keeping it in a very narrow corridor,” said David Kohl, chief economist at Julius Baer. This means that it has to buy a lot of government bonds and that liquidity in the market is very low when the upward pressure on interest rates is very high. Now she has fought her way and “said we’ll make the corridor bigger, then we don’t have to intervene so much,” said Kohl.
Japan has many challenges to overcome: the yen is extremely weak, wages have hardly increased for years and the consequences of deflation, i.e. sharply falling prices, are still in the bones of the Japanese. In the whole country it is accordingly – in contrast to the willingness to borrow in other countries – save, save, save. The result: Inflation in Japan is only around four percent, while in Germany it is around ten percent.
Stock markets on the dive
Nevertheless, more subsidies and price caps are promised to curb price increases, emphasizes Kohl. “Because it is a nuisance and burdens the political climate.” Unlike in Western countries, however, inflation in Japan is not being fought by the central bank, but by economic policy.
Therefore, the Bank of Japan is not stepping on the monetary policy brakes, as in other countries – at least so far. Because financial expert Walk sees a very clear strategy behind the first interest rate change for bonds: “Actually, she only wants to express that interest rates will not be raised radically now, but will be raised moderately.”
By signaling that monetary policy would only be tightened slowly, she could avoid damaging the economy. However, that was not so successful today, says Walk. The Japanese Nikkei index shows how strongly even smaller announcements affect the market. This lost more than two percent. The stock markets in Shanghai and Hong Kong also went on a dive.