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Japan Urged to Transition to a New Normal
Current Interest Rate Policy Inappropriate for the Economy
Japan needs to transition sooner to a "new normal" as the country's current ultra-low interest rate policy regime has been "inappropriate" and "very harmful" for the economy, according to Kevin Hebner, global investment strategist at TD Epoch. Japan's benchmark interest rate has remained at -0.1% since 2016, while other central banks worldwide have raised rates to rein in inflation. Hebner believes that allowing bond and equity markets to function more freely would be beneficial for financial markets.
BOJ's Loosening of Yield Curve Control
The Bank of Japan (BOJ) recently loosened its yield curve control by offering to buy 10-year Japanese government bonds at a fixed rate of 1.0%, instead of the previous rate of 0.5%. This move signals that the BOJ is willing to let the 10-year yield rise to as much as 1.0%. Hebner argues that the current policy of zero interest rates has created distortions and dislocations in the economy.
Effects of Moving Away from Negative Interest Rates
Transitioning away from negative interest rates would have far-reaching effects on the Japanese economy, including corporate investment and household savings. Most importantly for equity investors, the cost of capital would no longer be zero, which could encourage companies to create long-term value. These changes would also impact the value of the yen, which is currently undervalued against the dollar.
The BOJ's Transition Process and Future Outlook
Hebner acknowledges that the transition to a new normal will need to be reasonably slow to allow households and corporations to adjust. He also believes that longer-term Japanese government bond yields could significantly increase, from the current 58 basis points to 125 to 150 basis points. However, it is important to carefully assess how the market will react to the new ceiling of 1.0% for the 10-year yield. Despite the recent policy changes, some economists believe that Governor Kazuo Ueda will continue to avoid premature tightening and assess the economy's progress toward achieving 2% inflation.
Improvements in Japan's Economy
While there are signs of improvement in Japan, Hebner advises caution and skepticism. There is still potential for the market to move up significantly, particularly in sectors such as technology. However, Hebner reminds investors that it is still early days and that past experiences have shown the market's tendency to become overexcited.
Conclusion: Navigating the Impact on New Businesses in Japan
Encouraging Shift from Ultra-Low Interest Rates
The urgency for Japan to transition to a new normal, as urged by Kevin Hebner, will likely have implications for new businesses in the country. The current ultra-low interest rate policy has been deemed inappropriate and harmful for the economy. If the transition leads to a more freely functioning bond and equity market, it could create a favorable environment for new businesses seeking financial support and growth opportunities.
Far-Reaching Effects on the Economy
Moving away from negative interest rates would influence corporate investment and household savings, which can have a cascading effect on the overall economy. For new businesses, this could mean increased access to capital at a cost that is not zero. With a higher cost of capital, companies may be prompted to focus on long-term value creation, potentially attracting investors and stimulating innovation in various sectors.
Market Reaction and Outlook
While the transition process will likely be gradual, it is crucial to carefully evaluate how the market responds to the changes, such as the new ceiling of 1.0% for the 10-year yield. As Governor Kazuo Ueda continues to assess the economy's progress towards achieving 2% inflation, new businesses should remain vigilant and responsive to any shifts in market dynamics or policies that may affect their operations.
Potential Opportunities and Caution
Despite signs of improvement and potential market growth, caution and skepticism should be exercised by new businesses entering the Japanese market. Although sectors like technology may offer promising opportunities, it is essential to avoid overexcitement and maintain a realistic perspective. By carefully navigating the evolving landscape, new businesses can position themselves to benefit from the changes while mitigating potential risks associated with any market fluctuations.
In conclusion, Japan's transition to a new normal presents both challenges and opportunities for new businesses. By closely monitoring policy changes, evaluating market dynamics, and maintaining a cautious approach, new businesses can position themselves to thrive in an evolving economic landscape. Adaptability and strategic decision-making will be key for success in this shifting environment.
Article First Published at: https://www.cnbc.com/2023/07/31/strategist-boj-should-move-to-new-normal-sooner-current-policy-is-very-harmful.html