Japan: Interest Rate Outlook
2024-08-06
■ From President Ueda's speech, it seems that the next interest rate hike may not take too much time
■ Judging from the monetary policy of the Bank of Japan and its correlation with the yield of US treasury bonds, the yield of Japanese 10-year treasury bonds has limited room for growth
At a press conference after the monetary policy decision meeting on July 30th and 31st, Bank of Japan Governor Kazuo Ueda viewed the interest rate hike as an adjustment and consolidation of monetary easing, stating that if the economy and prices develop roughly according to the expectations shown in the "Economic and Price Outlook Report" (Outlook Report), interest rates will continue to rise. Despite some pointing out weak personal consumption, President Ueda emphasized that the trend of salary increases in spring labor negotiations is expanding, including the monthly labor statistics for May and the company's listening to opinions. This indicates that the Bank of Japan has adopted a forward-looking attitude in evaluating the economic and price situation rather than overly focusing on the actual economic trends.
President Ueda stated that the real interest rate is in a profound negative state and does not believe it will strongly impact the economy. He once again pointed out significant uncertainty in the neutral interest rate. He stated that the current policy interest rate level is much lower than the neutral interest rate. He also said that he did not pay special attention to the 0.5% policy rate limit nor deny the possibility of another interest rate hike within the year. The above viewpoints indicate that the next interest rate hike may not take long. In addition, he pointed out that the impact of exchange rate fluctuations on price movements is more significant than in the past, and there is an upward risk in price expectations, indicating a growing sense of vigilance towards inflation rates exceeding 2%. Taking into account the above factors, it can be expected that the policy interest rate will increase to 0.50% at the October meeting due to the boost effect of spring salary increases on personal consumption and to 0.75% at the April 2025 meeting due to the confirmation of the spring salary increase trend, approaching the neutral interest rate level. The outlook report points out that Japan's potential growth rate is around 0%, so the rate hike is expected not to exceed this level significantly. Attention should be paid to the speech by the Vice President of the Bank of Japan, Uchida, on the 7th and the prominent opinions of the monetary policy decision-making meeting on July 30th and 31st, announced on the 8th, to see if the market's expectations for additional interest rate hikes will change.
On the other hand, the yield of a 10-year treasury bond is expected to have limited room to rise. Although the change of monetary policy of the Bank of Japan will affect the correlation between the yield of 10-year treasury bonds of Japan and the United States, the current economic policy is similar to the "comprehensive monetary easing (combining policy interest rate operation with asset purchase)" adopted in October 2010. According to the correlation of this period, when the yield of the U.S. 10-year treasury bond is 3.50-4.50%, the Japanese 10-year treasury bond yield is estimated to be 1.25-1.48%. Although the Bank of Japan decided to gradually reduce the purchase of treasury bonds at its July meeting, the so-called stock effect of long-term interest rate depression brought about by the Bank of Japan's holding of treasury bonds still exists. Therefore, the upper limit of the yield of a Japanese 10-year treasury bond is expected to be 1.50%, with limited room for growth.
■ Judging from the monetary policy of the Bank of Japan and its correlation with the yield of US treasury bonds, the yield of Japanese 10-year treasury bonds has limited room for growth
At a press conference after the monetary policy decision meeting on July 30th and 31st, Bank of Japan Governor Kazuo Ueda viewed the interest rate hike as an adjustment and consolidation of monetary easing, stating that if the economy and prices develop roughly according to the expectations shown in the "Economic and Price Outlook Report" (Outlook Report), interest rates will continue to rise. Despite some pointing out weak personal consumption, President Ueda emphasized that the trend of salary increases in spring labor negotiations is expanding, including the monthly labor statistics for May and the company's listening to opinions. This indicates that the Bank of Japan has adopted a forward-looking attitude in evaluating the economic and price situation rather than overly focusing on the actual economic trends.
President Ueda stated that the real interest rate is in a profound negative state and does not believe it will strongly impact the economy. He once again pointed out significant uncertainty in the neutral interest rate. He stated that the current policy interest rate level is much lower than the neutral interest rate. He also said that he did not pay special attention to the 0.5% policy rate limit nor deny the possibility of another interest rate hike within the year. The above viewpoints indicate that the next interest rate hike may not take long. In addition, he pointed out that the impact of exchange rate fluctuations on price movements is more significant than in the past, and there is an upward risk in price expectations, indicating a growing sense of vigilance towards inflation rates exceeding 2%. Taking into account the above factors, it can be expected that the policy interest rate will increase to 0.50% at the October meeting due to the boost effect of spring salary increases on personal consumption and to 0.75% at the April 2025 meeting due to the confirmation of the spring salary increase trend, approaching the neutral interest rate level. The outlook report points out that Japan's potential growth rate is around 0%, so the rate hike is expected not to exceed this level significantly. Attention should be paid to the speech by the Vice President of the Bank of Japan, Uchida, on the 7th and the prominent opinions of the monetary policy decision-making meeting on July 30th and 31st, announced on the 8th, to see if the market's expectations for additional interest rate hikes will change.
On the other hand, the yield of a 10-year treasury bond is expected to have limited room to rise. Although the change of monetary policy of the Bank of Japan will affect the correlation between the yield of 10-year treasury bonds of Japan and the United States, the current economic policy is similar to the "comprehensive monetary easing (combining policy interest rate operation with asset purchase)" adopted in October 2010. According to the correlation of this period, when the yield of the U.S. 10-year treasury bond is 3.50-4.50%, the Japanese 10-year treasury bond yield is estimated to be 1.25-1.48%. Although the Bank of Japan decided to gradually reduce the purchase of treasury bonds at its July meeting, the so-called stock effect of long-term interest rate depression brought about by the Bank of Japan's holding of treasury bonds still exists. Therefore, the upper limit of the yield of a Japanese 10-year treasury bond is expected to be 1.50%, with limited room for growth.