Recently, Japan is preparing to announce its victory over deflation and plans to end yield curve control (YCC) and negative interest rate policies.
This marks an important turning point and the end of an era.
Although I think it is too early for Japan to declare victory over deflation, I have previously outlined three reasons in my earlier articles.
However, Japan's monetary policy is indeed likely to change soon. The Bank of Japan (BOJ) has been continuously hinting at adjustments, making this shift almost inevitable.
After Japan abandons negative interest rates, an unresolved question is to what level interest rates will rise.
Currently, BOJ officials suggest that they will only raise rates by 20 basis points, increasing the rate to 0.1%.
Although this value is not high, it is different from zero interest rates.
Currently, Japan's consumer spending has not significantly recovered, so a large interest rate hike is unlikely, and the probability of rates rising above 0.5% is almost zero.
UBS predicts that by 2025, the BOJ's policy rate will remain at zero or 0.1%, while Morgan Stanley expects it to rise to 0.25% by July.
Many domestic analysts are already warning that Japan's rate hike could impact China's currency and stock markets, suggesting that it would be unfavorable for the RMB and stocks.
After a rate hike by the BOJ, the yen would appreciate, having limited impact on the US dollar but somewhat suppressing it, thus benefiting the RMB.
For the stock market, Japan's rate hike is unlikely to have a significant impact.
Although some investors previously drove a 30% premium on the Nikkei ETF, it is not believed that capital will flow into Japan in large amounts.
Post rate hike, the greater concern lies with Japan's own stock market and economy.
Japan's government debt ratio is as high as 200%, the highest in the world.
In the past, Japan maintained its economy with negative interest rates, and the BOJ continuously bought stocks, currently being the largest shareholder in the Japanese stock market, holding 10% of Japan's circulating stocks.
If yield curve control is abandoned, the annual interest expenditure will become a huge burden.
In fact, government bonds in most countries are a type of Ponzi scheme, with debt growing especially rapidly in Japan and the US.
The US can sustain its debt by selling bonds to global investors, but what about Japan?
Additionally, despite Japan's sluggish domestic GDP growth, its major corporations have expanded overseas and utilized exchange rate advantages, effectively rebuilding a "Japan" abroad.
This is the foundation upon which the Japanese government can continuously increase its debt.
In the future, if Japan loses its exchange rate advantage, can this model continue? I have my doubts.
Moreover, one important reason Buffett bought into Japan's five major trading houses was to arbitrage with low-interest funds.
If Japan raises interest rates and the US cuts them, the arbitrage space will shrink. Can this model still sustain itself?
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