Japan's Central Bank Mulls Rate Hike Amid Vanishing Deflation
Thirty-four years ago in Tokyo, Japan, the Nikkei 225 index reached 33,000 points, then began a decades-long decline and fluctuation. Japan fell into what is referred to as the "Lost Thirty Years," but today, 34 years later, the Japanese stock market has broken through its previous peak, declaring the "return of the king" in Japan's financial market.
The world's third-largest exchange, the Tokyo Stock Exchange in Japan.
Many people have a question: why has China's economy developed so well over the past few decades, but the A-share market has performed averagely, frequently trending on social media, while Japan, which we perceive as being half-dead, has such a well-developed stock market that the Bank of Japan is even considering raising interest rates?
Today, let's discuss this topic from the perspective of the Bank of Japan's interest rate hike, the gradual disappearance of deflation in Japan, and the Japanese stock market. Writing is not easy, so welcome to like, share, and bookmark.
The Black Swan is coming, is the Bank of Japan going to raise interest rates?
Most economists believe that the Bank of Japan will abandon its previous "negative interest rate" policy in 2024, ending the negative interest rates that have been maintained for several years through interest rate hikes, and steering the Japanese economy onto the so-called "right track."
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Investors who have already accepted Japan as a deflationary country will inevitably face the impact of the yen exchange rate and Japanese interest rates on the financial market.
So why does the Bank of Japan want to raise interest rates? Before answering this question, let me briefly explain the reason for the domestic interest rates in Japan turning negative.
After the Japanese stock market bubble and real estate bubble in 1989, Japan fell into absolute "deflation," which means that social demand is less than supply. Japanese people were unwilling to spend money, and businesses were unwilling to expand. The once vibrant Japanese economy suddenly became gloomy.
Therefore, in order to stimulate the economy, the Japanese government had to significantly and continuously lower interest rates, thereby making the Japanese people understand that it is better to consume and invest than to save money, since there is no interest in the bank anyway.However, the Japanese were intimidated by this epic stock market disaster, with many preferring to accept low interest rates and keep their money in banks rather than investing in the stock market.
Later, when Shinzo Abe came to power, he implemented what is known as "Abenomics," which boldly carried out the so-called "absolute quantitative easing." This was done by the central bank directly purchasing government bonds in unlimited quantities to inject liquidity into the market and push Japanese interest rates down to 0. This began to drive the growth of the Japanese stock market and economy.
Now, despite Shinzo Abe having stepped down and tragically passing away, Abenomics and the United States' quantitative easing have kept Japan's inflation data continuously rising. In February of last year, it reached the highest at 4.3%, and it is still around 2.8% now, which is a relatively good inflation figure.
Moreover, with Japan's GDP growth forecast for this year at 1.6%, performing steadily in this international environment, the Bank of Japan believes that Japan can start considering exiting negative interest rates. Japan will take steps to stimulate the stock market and other means to move out of the shadow of Abenomics and choose a different path for development.
In November 2023, the market began discussing the black swan of the Bank of Japan's rate cut. In December 2023, the Bank of Japan rarely stated that it would not raise interest rates, making a dovish statement and indicating that it would continue to watch and wait.
Nevertheless, Japan's inflation for 2024 will remain around 2%, and around April 2024, the Bank of Japan will take action to raise interest rates, allowing domestic Japanese interest rates to break free from the negative interest rate era that has lasted for many years!
Has deflation disappeared? Has the Japanese economy really made a comeback?
The economic growth rate is good, CPI is beginning to increase, and the stock market is setting new highs. So, has Japan's deflation really disappeared? Has the Japanese economy made a comeback?
Experts estimate that the Bank of Japan will lower interest rates around April of this year.
Firstly, Japan's deflation problem is deeply rooted and has become a major challenge for the Japanese government. Recently, there has been a lot of controversy in Japan about wages, and the actual income of the Japanese people is actually decreasing. Therefore, the current Bank of Japan does not dare to claim that it has solved the deflation problem and can only continue to say that it is "cautiously observing."Additionally, Japan's deflation is also subject to the whims of the United States and the Federal Reserve. If inflation in the U.S. continues, the Federal Reserve will maintain its current high rates, which will slow down the timing of the Bank of Japan's interest rate hikes. Conversely, if the U.S. economy slides quickly from a soft landing to a hard landing, the pace of interest rate hikes by the Bank of Japan will also be affected.
Labor relations are tense in Japan's "Spring Struggle."
So, has the current deflation disappeared? In fact, it has largely disappeared in the past two years. However, life for the Japanese people has not improved; instead, issues arising from inflation have begun to emerge, such as continuous disputes between labor and capital, creating a very tense atmosphere.
But in the long term, whether the Japanese people start to intervene in consumption and whether Japanese companies are willing to invest rather than repay debts and loans is what the Bank of Japan needs to focus on.
Looking again at the Japanese economy, the performance in the first half of last year was indeed quite good. The first quarter saw a growth of 2.3%, and the second quarter had 2.5%, which is quite good for Japan; however, the third quarter only had 1.2%, which was not good, and the data for the fourth quarter has not yet been released, but the estimated situation is not very optimistic either.
Japan's per capita nominal GDP was $40,000 in 2021, but it dropped to $34,000 in 2022, marking the largest decline since 1980. Therefore, the international purchasing power of the Japanese people is actually decreasing.
The real wages of the Japanese people are decreasing.
So, even if economists say that the Japanese economy is shifting from exports to domestic demand, how strong is this shift? Can domestic demand in Japan boost the domestic economy? I think this is a question that needs to be raised.
So why has the Japanese stock market risen? This is directly related to the new Japanese Prime Minister, Kishida.
After Kishida took office, he implemented an economic policy called "New Capitalism," encouraging Japanese residents to invest their savings in the stock market to achieve an appreciation of household financial assets through stock market growth. A series of supporting policies have been introduced, such as tax exemptions and the like.Even Warren Buffett followed suit, optimistic about the Japanese stock market, and directly invested by purchasing shares in Japan's five major trading houses, becoming a major shareholder in them. After all, the "Oracle of Omaha" is not one to be trifled with; following his purchase, the stock prices of these companies also saw a significant increase.
Therefore, the recent rise in the Japanese stock market is more a result of adjustments in financial policy, with little to do with Japan's economic or monetary policies. The relationship with deflation and the Consumer Price Index (CPI) is also not very apparent.
Summary
One of the black swans of 2023 was the Bank of Japan's hint at implementing an "interest rate hike." Many people considered this Japan's "Pearl Harbor attack on the United States." After all, as one of the world's largest debtor nations, Japan's debt stands at 1063 trillion yen, more than twice the increase in GDP.
Will Japan's debt crisis explode?
However, this year, this black swan will turn into a gray rhino, becoming one of the most important financial events of 2024. Should the Bank of Japan raise interest rates, the enormous debt in Japan would generate very high interest payments, exacerbating Japan's fiscal situation.
Thus, even though the Japanese stock market has indeed reached new highs, has Japan's economy really made a comeback? I think not necessarily.
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