Japan: ‘Bank of Japan Shock’ lead to policy adjustments
2024-08-09
■ The severe market fluctuations since the end of July were caused by the Bank of Japan's communication errors.
■ The Bank of Japan was forced to adjust its policy direction and faced communication challenges in raising interest rates.
Since the monetary policy meeting of the Bank of Japan on July 30th and 31st, the Japanese yen has sharply appreciated, and the Japanese stock market has plummeted. Although the subsequent release of July US employment data was exacerbated by overseas factors such as rising unemployment rates, the Japanese stock market and yen volatility was exceptionally high, indicating that domestic factors had a significant impact. The main reason lies in the response of the Bank of Japan, not in the decision to raise interest rates by 0.15% itself, but in the failure of communication with the market (i.e., the failure of dialogue with the market). The author previously commented that in its policy decisions, the Bank of Japan has already clarified that it plans to gradually raise policy interest rates as the economy and prices develop as expected. The implementation of this interest rate hike will have an impact on future dialogue with the market. (Omitted) The formation of the expectation of Japan's interest rate hike has a more significant effect on the market pricing mechanism than the decision itself. Looking back at the market trends in the second half of last week, although the volatility exceeded expectations, the market response was basically in line with expectations.
In his speech at the Hakodate Financial and Economic Symposium after the Bank of Japan's monetary policy meeting, Vice President Uchida acknowledged that the "significant fluctuations in stock prices and exchange rates over the past week" had affected economic and price expectations and made precise adjustments to policy direction, stating that "in the context of rapid fluctuations in domestic and international financial markets, it is necessary to maintain the current monetary easing policy temporarily. He attempted to quickly convey the policy of continuously raising policy interest rates to neutral levels based on current economic and price expectations to the financial market. Still, he paid a huge price as a result.
From the perspective of communication errors by the central bank leading to chaos in the financial market, the "tapering panic" in 2013 is similar, and the severe market fluctuations this time are also compared to the "Bank of Japan oscillation." In the "tapering panic" of 2013, the Federal Reserve (FRB) hinted at gradually reducing quantitative easing (QE) policy in May but later postponed the decision to reduce QE due to severe fluctuations in financial markets until December of the same year (starting in January of the following year). The insufficient market expectations are similar to this situation. In the process of normalizing a series of monetary policies, the dialogue between the Bank of Japan and the market is not sufficient, and how to improve communication policies in the future interest rate hike process has become a new issue.
■ The Bank of Japan was forced to adjust its policy direction and faced communication challenges in raising interest rates.
Since the monetary policy meeting of the Bank of Japan on July 30th and 31st, the Japanese yen has sharply appreciated, and the Japanese stock market has plummeted. Although the subsequent release of July US employment data was exacerbated by overseas factors such as rising unemployment rates, the Japanese stock market and yen volatility was exceptionally high, indicating that domestic factors had a significant impact. The main reason lies in the response of the Bank of Japan, not in the decision to raise interest rates by 0.15% itself, but in the failure of communication with the market (i.e., the failure of dialogue with the market). The author previously commented that in its policy decisions, the Bank of Japan has already clarified that it plans to gradually raise policy interest rates as the economy and prices develop as expected. The implementation of this interest rate hike will have an impact on future dialogue with the market. (Omitted) The formation of the expectation of Japan's interest rate hike has a more significant effect on the market pricing mechanism than the decision itself. Looking back at the market trends in the second half of last week, although the volatility exceeded expectations, the market response was basically in line with expectations.
In his speech at the Hakodate Financial and Economic Symposium after the Bank of Japan's monetary policy meeting, Vice President Uchida acknowledged that the "significant fluctuations in stock prices and exchange rates over the past week" had affected economic and price expectations and made precise adjustments to policy direction, stating that "in the context of rapid fluctuations in domestic and international financial markets, it is necessary to maintain the current monetary easing policy temporarily. He attempted to quickly convey the policy of continuously raising policy interest rates to neutral levels based on current economic and price expectations to the financial market. Still, he paid a huge price as a result.
From the perspective of communication errors by the central bank leading to chaos in the financial market, the "tapering panic" in 2013 is similar, and the severe market fluctuations this time are also compared to the "Bank of Japan oscillation." In the "tapering panic" of 2013, the Federal Reserve (FRB) hinted at gradually reducing quantitative easing (QE) policy in May but later postponed the decision to reduce QE due to severe fluctuations in financial markets until December of the same year (starting in January of the following year). The insufficient market expectations are similar to this situation. In the process of normalizing a series of monetary policies, the dialogue between the Bank of Japan and the market is not sufficient, and how to improve communication policies in the future interest rate hike process has become a new issue.