TOKYO — Japan is the world’s largest
creditor. At the end of 2021, it held roughly $3.2 trillion in foreign assets,
30 percent more than No. 2 Germany. As of October, it owned over $1 trillion of
US government debt, more than China. Japanese banks are the world’s largest
cross-border lenders, with nearly $4.8 trillion in claims in other countries.
اضافة اعلان
Late last month, the world got an
unexpected reminder of how integral Japan is to the global economy, when the
country’s central bank unexpectedly announced that it was adjusting its stance
on bond purchases.
To those unversed in the intricacies of
monetary policy, the significance of Japan’s decision to raise the ceiling on
its 10-year bond yields may not have been immediately clear. But for the
finance industry, the surprising change raised expectations that the days of
rock-bottom Japanese interest rates could be numbered — potentially further
squeezing global credit markets that were already tightening as the world
economy slows.
Since this summer, the Bank of Japan has
been an outlier, keeping its interest rates ultralow even as other central
banks raced to keep up with the US Federal Reserve, which has ratcheted up lending
costs in an effort to tame high inflation.
As global rates have diverged from those in
Japan, the value of the yen has fallen as investors sought better returns
elsewhere. That has put pressure on the Bank of Japan to shift the world’s
third-largest economy away from its decade-long commitment to cheap money, a
policy known as monetary easing.
After the announcement, global stock markets dropped. The yen surged more than 3 percent. And bond yields shot up.
Japan’s deep integration into global
financial networks means that there is a lot of money riding on the timing of
any move away from that policy, and investors have spent years fruitlessly
waiting for a sign.
Caught off guardAs of mid-December, the overwhelming
expectation was that the bank would hold off on any changes until next spring,
when Haruhiko Kuroda, the Bank of Japan’s governor and an architect of its
current policies, is set to step down.
So when the bank made its bond yield
announcement, which effectively raised interest rates, it caught virtually
everyone off guard.
Kuroda has been adamant that the decision
does not represent a fundamental change in monetary policy. He has insisted
that it was intended to encourage trading in 10-year bonds — the bank’s
preferred tool for controlling interest rates — which had slowed to a trickle
under the bank’s tight controls.
But markets, at least in the short term,
were not convinced. After the announcement, global stock markets dropped. The
yen surged more than 3 percent. And bond yields shot up.
Central banks following a conventional
monetary policy tend to focus on controlling short-term interest rates and let
markets determine long-term rates. But in 2016 — with inflation still dormant —
Japan decided to attempt something very unusual: It would seek to directly
control some longer-term rates as well, using an untested policy called “yield
curve control”.
Financial institutions set their interest
rates, whether on a bank loan or a corporate bond, based in part on the
expected yields from government bonds. Reducing the market’s role in
determining the prices of those bonds, the Bank of Japan figured, would let it
better control lending conditions.
The mechanism for accomplishing that
depended on one of a bond’s most fundamental attributes: Its price and yield
move in opposite directions. The lifetime value of a bond is fixed on the day
it is issued, so if you pay more for it, your returns — the yield — go down. If
you pay less, they go up.
From rising inflation to raising
interest ratesWhen the Bank of Japan introduced its new
policy, it committed to buying as many bonds as necessary at whatever price was
required to keep yields around zero percent on the 10-year bond, the benchmark
for other rates.
Things did not quite go as planned.
Most experts believe that the process of unwinding Kuroda’s monetary easing policy, when it happens, will take years.
Rates stayed low, and inflation did, in
recent months, hit the 2 percent benchmark. But it kept climbing, reaching 3.7
percent in November, a 40-year high. And most of that was not the good,
wage-boosting, demand-driven inflation the Bank of Japan wanted. It was “bad”
inflation created by supply shortages from the pandemic and Russia’s war on
Ukraine.
What is more, the growing gap between
interest rates in Japan and elsewhere was pushing down the yen’s value, piling
even more stress on the country’s highly import-dependent economy. That made
some analysts speculate that the Bank of Japan would soon be forced to raise interest
rates.
Which brings us up to December, when Kuroda
suddenly announced that the bank would double the ceiling on 10-year bond
yields, allowing them to fluctuate between plus and minus 0.5 percent, and
effectively raising interest rates.
To many investors, the decision seemed like
the first tentative step toward even bigger rate increases. As bond yields have
jumped, the bank has had to spend heavily to defend its rate target.
Which raises the question, how much longer
can the Bank of Japan stick to it its guns?
Most experts believe that the process of
unwinding Kuroda’s monetary easing policy, when it happens, will take years. It
is certain to be complicated: Many Japanese borrowers have become accustomed to
cheap money — variable interest rates are common, for example — and a hasty
retreat could strain households and firms alike.
It could also be painful for global markets
that have come to take Japan’s loose monetary policy for granted. Years of
anemic growth and a decade of super-low interest rates have pushed many
Japanese investors to seek higher returns abroad, increasing their already
prominent role in global credit markets.
Although unlikely, a rapid reversal by the
Bank of Japan “could generate some hard-to-anticipate shock waves around the world”,
said Brad Setser, a fellow at the Council on Foreign Relations and an expert on
global trade and capital flows. “In the worst-case scenario, rapid rises in
long-term Japanese rates push up long-term interest rates globally.”
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