The other is the belief that even if the CPI is a little higher than expected,

The other is the belief that even if the CPI is a little higher than expected, it will eventually come down, and Yellen and Goolsbee come forward and say, “This is not a big deal.” The market seemed to gain more confidence here, and Buy the Dip came out with the idea that it was a chance to buy at a low price. As interest rates and oil prices, which had surged, bowed their heads a little bit, now the highs of interest rates and oil prices are at their peak. But this rally in asset prices … could touch inflationary sentiment rather than inflation itself. I think the Fed will think about this and change its words a little bit in the future. Today, I’m going to deal with a little bit outside of the United States. Let’s talk about Japan.

The Bank of Japan is now at a crossroads. Introduced at the end of January 2016, is it going to lift negative interest rates, which have been around for almost eight years… or wait a little bit as much as this can somehow shock the market. As prices are rising in Japan, and the IMF, which is giving Japan a lot of advice, is recommending rate hikes, so something has to be changed. One more thing, at the financial policy meeting in January, the members of the Bank of Japan said that now was a great opportunity to lift negative interest rates. It could. The Fed is now considering lowering interest rates. If Japan raises interest rates when the Fed is about to hit them, it could quickly narrow the gap between Japan and the United States. This could make the Japanese yen stronger.

The Japanese authorities have a clear idea of the impact of a strong yen. The Japanese economy has been pushed to the edge of the deflationary swamp by the yen’s strength in the decade since the Plaza Agreement and the yen’s strength in the four years following the financial crisis. Japan also wants to change because prices continue to rise and the yen cannot remain weak, but a sudden abolition of negative interest rates after eight years could frighten the market. And the timing is also at a time when the United States is preparing to cut its benchmark interest rate. But the worry has to grow. I don’t know when the US interest rate cut will be, but I don’t think it will be at least March. For example, if it is pushed back to June or the second half of the year, the Bank of Japan won’t have to abolish negative interest rates, or raise interest rates, which are in line with the US interest rate cut. It’s a good idea to proceed preemptively.

Isn’t that why the members of the Bank of Japan say it’s golden time? Well, it’s a golden opportunity. Timing is art. We shouldn’t miss this timing. Nevertheless, it’s a change in eight years because it could have an unintended impact on the economy, on the system, on the financial market. First of all, the impact on the economy can’t be seen in real time. You’ll have to wait to see. But you can see what the reaction of the financial market is. How to raise interest rates with the least possible impact on the financial market? This is something the Bank of Japan will have to think about.

What I wrote in my previous essay is, what do you expect from the market? If you go wild in that expected direction, the market may move excessively. This is not what I’m talking about, but what Bank of Japan Governor Ueda said himself. I think everybody’s going to raise interest rates. And if you raise interest rates just as the market expects, then interest rates will skyrocket, the yen will go super strong, which is going to be a market reaction that the Bank of Japan didn’t expect. So what should we do? If there’s a point where the market is expecting … at that point, we’re going to sneak around … and make changes at a time when the market didn’t expect it to … we can think about things like this.

But it’s also very vague. Why? It’s a change in eight years. I’ve never had the experience of switching from negative to positive, so I’m afraid the market reaction is too strong to approach it with the backstabbing method. It’s because the weight is different from raising the YCC rate from 0.25% to 0.5% in the past year. In a sense, it goes from mitigation to austerity… We need to find something to communicate well with the market while minimizing the side effects. Minimizing side effects.. Slowly rising interest rates & mildly strengthening of the yen.. And I don’t know when the Fed will be, but it will cut interest rates in the near future… It would be common sense to move to raise interest rates before then.

So the Bank of Japan has started talking about things that it didn’t do before. It’s also trying to season the market. It’s looking at current market expectations. It’s kind of a different picture from what the Bank of Japan has been showing. I’m quoting an article. I want you to look at it carefully, even if it’s long.

“The Bank of Japan (BOJ) has made it clear its monetary policy shift (pivot) for the first time in more than a decade. The younger generation of private economic players have no experience of tightening. It is difficult to gauge its influence as it is contrary to the easing of central banks in major countries. In the end, the BOK chose to communicate instead of “my way.” It said it would directly disclose the consensus of the Tokyo bond market and refer to it. At this point, we can see indirectly the BOK’s plan to raise the hike.

According to the BOK’s speech at a meeting of Finance and Economy Minister Shinichi Uchida at Nara Prefecture on Wednesday, the BOK presented a graph of forward (forward) interest rates inherent in the OIS curve formed in the Tokyo bond and swap market. The OIS rate for three months was around 0% as of the last 5 days. This means that market participants expect the BOK to come out of negative (-) interest rates within three months. (Medium)

Looking at the graph, the Tokyo bond and swap market reflects the BOK’s fairly modest interest rate hike. It is diagnosed that the policy rate will be at 0.3% in the next year. Another year from this, it is about 0.5% to 0.6%. This means that the rate of increase is constant and the number of times is not expected to be frequent.

Uchida said, “As you can see in this chart, the current market expects policy rates to increase very gradually,” adding, “The BOK refers to this view of the financial market when assuming policy rates to prepare for the outlook for economic activity and prices.” Recently, central banks in major countries have been moving to “manage” market expectations, but the BOK seems to “respect” the market. It is analyzed that the ripple effect of policy through the market is more important. There is caution about pivoting, which has not been implemented in the past decade or so.

“Even if the negative interest rate policy is terminated, it is difficult to imagine a path to continue to raise interest rates quickly afterwards,” Vice President Uchida said. “Given that large-scale easing policies have been around for more than a decade, it is necessary to make every effort to communicate and operate the market so that discontinuity does not occur in the financial market before and after the policy transition period.” (Yonhap Infomax, 24. 2.8)

The quote is long. It consists of about five paragraphs… Let’s point it out one by one. First of all, the Bank of Japan chose to communicate with the market rather than My Way. I mentioned that I would approach the market honestly because I don’t know what impact a historical shift in monetary policy would have. So far, the market’s known prospect… That is, the prospect of ending negative interest rates in March-April… is the mainstream, and I said that I would respect and follow the market’s reaction under this assumption.

The second and third paragraphs are about how the market sees future changes in interest rates when it actually makes those changes. And in the next three months, negative interest rates will be lifted. And in the first quarter of next year, we’re expecting interest rates to be at 0.3%. And after that negative interest rate was lifted in March and April this year, we’re seeing one, or maybe a little bit more, by the end of the year. And then a year from that, maybe two years from now, interest rates will rise by 0.5 to 0.6%. So yes, we’re expecting negative interest rates to be lifted in March and April, one hike by the end of the year, and another hike next year. We’re expecting a very modest rate hike.

Uchida, vice president of the Bank of Japan, had an extraordinary briefing session with these market expectations, and he says he’s referring to the market’s view, which is not surprising by hitting the back of the market, but if the market sees it at this level … I think it’s better to make a modest change by harvesting this market response. The market expects it mildly, but rather than shaking it, the impact will be minimized.

In fact, Ueda’s remarks came out on the 8th, and the Japanese yen weakened after that. The foreign exchange market shows that it is not affected by the rate of interest rate hikes. As interest rates on U.S. government bonds soared due to the U.S. CPI announcement, the Japanese yen was agonizing over the rapid weakening. In the past year, raising interest rates was so burdensome that the Bank of Japan responded to the weakening of the yen by verbally intervening or directly intervening in the foreign exchange market. However, this time, you will also think about how to respond by lifting negative interest rates.

And the Bank of Japan, in fact, is thinking, “This is…” Let’s talk about the last paragraph. It’s saying that even if we end negative interest rates, we’re not going to end up raising interest rates wildly, we’re going to go really slowly.