Bank of Japan Calms Markets with Pledge to Maintain Low Interest Rates
2 Sources
2 Sources
[1]
Bank of Japan Calms Markets With Pledge Not To Raise Rates Amid Volatility
Fears of the reversal of the Japanese yen carry trade have been cited as one factor fueling Monday's global stocks rout, apart from worries of a U.S. recession and AI overspending by tech giants. Japan's central bank said that it won't be increasing interest rates amid unstable markets, sending global stocks rising Wednesday. Japan's Nikkei closed higher, Europe's Stoxx 600 benchmark is gaining, and U.S. stock futures are rising after the Bank of Japan calmed investor fears of the unwinding of the carry trade and said it wouldn't raise interest rates when capital markets are "extremely volatile." Deputy Gov. Shinichi Uchida said in a speech in Hokkaido, Japan, that the central bank "will not raise its policy interest rate when financial and capital markets are unstable." His comments come a week after Bank of Japan Gov. Kazuo Ueda said he would continue to keep raising interest rates despite the tepid consumer spending in the country. The Bank of Japan became the last major central bank to abandon its negative interest rate policy in March and last Wednesday surprised markets when it raised its policy rate by 10 basis points to 0.25%, only its second rate hike in the last 17 years. Fears of the reversal of the Japanese yen carry trade have been cited as one factor fueling Monday's global stocks rout, apart from worries of a U.S. recession and tech giants' overspending on artificial intelligence (AI) initiatives. A carry trade is an investment strategy that involves borrowing the currency of a country where interest rates are low, like Japan, and investing it in a place where interest rates are high, such as the U.S. Rising interest rates in Japan would threaten that trade.
[2]
Japan got so spooked by Monday's market meltdown that it's now playing cool on more interest-rate hikes
This story is available exclusively to Business Insider subscribers. Become an Insider and start reading now. Have an account? Log in. "I believe that the Bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile," said Uchida at a local event in Hokkaido. The comments were "a strong dovish signal" that played down the chances of near-term rate hikes amid such volatile markets, wrote Jim Reid, a strategist at Deutsche Bank, on Wednesday. Uchida's statement came after Monday's massive meltdown in the global stock market that some analysts blamed on the Japanese central bank's rate hike last week that unraveled yen carry trades. This tipped global markets over the edge amid existing concerns over the US economy, cooling enthusiasm for AI, and geopolitical concerns. It's not the first time Japanese officials have sought to calm the market turmoil that sent the Nikkei to its worst one-day percentage loss since Black Monday in 1987. On Tuesday, Japanese officials from its finance ministry, financial regulator, and BOJ met to discuss the massive sell-off. Prime Minister Fumio Kishida himself urged calm. Uchida's dovish signal on Tuesday boosted Asian shares. Japan's benchmark Nikkei 225 index jumped as much as 4% by 2.45 p.m. local time. Since its rebound yesterday, it has regained nearly all its losses on Monday. Meanwhile, the yen lost over 2% against the US dollar. Despite the BOJ cooling attitude on rate hikes -- at least for now -- there are still risks associated with the yen carry trade, which could further unwind if the Fed cuts rates rapidly. The trading strategy involves borrowing cheaply in Japan's ultra-low interest rate environment and using the funds to invest in higher-yielding, such as US tech stocks, elsewhere. Nobody seems to know how much carry trade is at stake. As Macquarie's analysts wrote in a Tuesday note. "We do not profess to have all of the answers as to the breadth and depth of the unwind of the yen carry trade." Bloomberg estimates there could be trillions at stake, pointing to potential complications. A JPMorgan strategist has said that the carry trade unwind is only half done. It could complicate the the Fed's interest rate decisions. The US central bank recently signaled that it could start cutting rates as soon as September. "The natural reaction from the Fed to soft labour market data and fresh recession risks would be to cut rates and to do so relatively rapidly. But this would exacerbate any carry trade unwind," wrote analysts at GlobalData.TS Lombard in a Monday note.
Share
Share
Copy Link
The Bank of Japan reassures markets by committing to its ultra-loose monetary policy amid recent volatility. This decision comes as a surprise to investors who anticipated potential policy changes.
Bank of Japan's Unexpected Stance
The Bank of Japan (BOJ) has taken a decisive step to quell market volatility by reaffirming its commitment to maintaining ultra-low interest rates. This move comes as a surprise to many investors who had been anticipating potential policy changes in the near future
1
. The central bank's decision has effectively cooled speculation about imminent interest rate hikes, providing a sense of stability to the financial markets.Market Reaction and Implications
The BOJ's announcement had an immediate impact on the markets. The yield on 10-year Japanese government bonds, which had risen to 0.96% last week—its highest level since 2013—dropped to 0.72% following the central bank's statement
2
. This significant decrease in yields reflects the market's adjustment to the BOJ's unexpected stance on monetary policy.Global Context and Economic Factors
The BOJ's decision comes at a time when other major central banks, such as the U.S. Federal Reserve and the European Central Bank, have been raising interest rates to combat inflation. Japan, however, faces a unique economic situation with persistently low inflation and sluggish wage growth
1
. These factors have contributed to the BOJ's reluctance to shift away from its accommodative monetary policy.Policy Details and Future Outlook
Under its current policy, the BOJ maintains short-term interest rates at -0.1% and caps 10-year bond yields around 0%
2
. The central bank has stated that it will continue with large-scale bond purchases and other easing measures to support the economy. While the BOJ has pledged to maintain this stance for now, it has also indicated that it will remain vigilant and respond to any significant changes in the economic landscape.Related Stories
Implications for the Yen and International Trade
The yen weakened against other major currencies following the BOJ's announcement, potentially benefiting Japanese exporters by making their products more competitive in international markets
1
. However, this could also lead to increased import costs, particularly for energy and raw materials, which Japan heavily relies on from overseas.Challenges and Criticisms
Despite the BOJ's efforts to stabilize markets, some economists and market analysts argue that the central bank's ultra-loose monetary policy is unsustainable in the long term. Critics point to the potential risks of asset bubbles and the erosion of the yen's value as concerns that may need to be addressed in the future
2
. The BOJ will need to carefully balance these concerns with its mandate to support economic growth and achieve its inflation target.References
Summarized by
Navi
Related Stories
Weekly Highlights
1
OpenAI Completes Historic Restructuring, Creating $500 Billion Public Benefit Corporation
Business and Economy
2
OpenAI Eyes Potential $1 Trillion IPO Amid Massive Losses and Infrastructure Spending
Business and Economy
3
Nvidia Reaches Historic $5 Trillion Valuation Amid Growing AI Investment Concerns
Business and Economy
Weekly Highlights
Today's Top Stories
Your Daily Dose of Curated AI News
Don’t drown in AI news. We cut through the noise - filtering, ranking and summarizing the most important AI news, breakthroughs and research daily. Spend less time searching for the latest in AI and get straight to action.
