With the Market’s Attention

With the Market’s Attention on Trump’s Tariffs… Other issues also seem to be highlighted quite a few times. In Japan, Governor Ueda and other economic players are also commenting that the current Japanese economy is in an inflationary situation rather than deflation. Is it not long before Japan declares an escape from deflation? Perhaps that’s why interest rates on government bonds in Japan have risen quite a bit. The 10-year government bond rate has exceeded 1.3 percent for the first time since 2011 (though it turned back at dawn of course), and this rise in Japanese interest rates has been accompanied by the strong yen. For your information, the dollar exchange rate has fallen from the end of last year to the current level of 1,450 won, and the euro has also fallen to the level of 1,500 won. However, the yen is about 945 won, slightly higher than then. If you look at inflation, you have to raise interest rates. If you look at deflation, you have to maintain low interest rates. A strategy to put a little more weight on inflation while walking a tightrope in the meantime… I think this will be the core of Japan’s monetary policy. I don’t think it’s going to go up right now, but as time goes by, interest rates are rising as Sinab… This is the point.

First of all, Japan has raised interest rates. They say that additional interest rate hikes will gradually come on the clock. If the U.S. economy remains in good shape, and the U.S. 10-year Treasury rate remains at a high level, there will be no problem… If concerns over a U.S. economic downturn are highlighted and 10-year interest rates fall, the issue of yen carry could arise. Yes. In the U.S., it is a problem even if interest rates rise, and it is a problem even if they fall. Then, wouldn’t the U.S. also feel like it is important to keep the interest rate on U.S. government bonds in a box as well as the U.S. has a lot of concerns? The direction of the yen, the difference in interest rates between the U.S. and Japan… Let’s check it out the same way.

Let me talk briefly about the Bank of Korea today. Since the end of last year, the Bank of Korea has expressed its willingness to introduce an integrated policy system in determining interest rates. In the case of Korea, which is not a key currency such as the U.S., it should not simply consider growth and inflation when making monetary policy decisions… Financial stability? Yes. Internally, household debt is exploding and housing prices are unstable. And externally, capital outflows are concerned due to widening interest rate gap with the U.S. This is also linked to soaring exchange rates. That’s the core of the integrated policy-making system. In Korea, growth is slowing and prices are below 2% based on the source, so it is not too much to cut interest rates… by the end of the day… The financial stability I mentioned could hamper interest rate cuts. Excessive household debt levels and the metropolitan housing market ready to jump up at any time… If you look at this, the destabilizing factors of internal financial stability continue to live, and Trump’s brinkmanship policy and so on, the exchange rate creates instability from an external perspective. When they come together into the equation, it becomes a quaternary equation, not just growth, prices, exchange rates and household debt. It gets harder to solve… T.T Taking this into account, let’s read comments on neutral interest rates from the BOK’s executive branch. It’s important, so it’s a little difficult. Let’s take a closer look at it.

The executive added, “If financial imbalances and external factors are additionally considered, it is estimated to be higher than the neutral interest rate considering only growth and prices.” The BOK executive said, “As prices and growth flows, household debt ratios, internal and external interest rate differences and high exchange rate volatility have recently been considered together, it is necessary to operate monetary policy while using various neutral interest rates as reference indicators in the future,” adding, “Given the uncertainty in estimating neutral interest rates, it is also necessary to use various related indicators such as financial conditions, prices and growth flows.”

In response, some members of the Monetary Policy Committee advised, “It seems appropriate to refer to the neutral interest rate that comprehensively considers financial stability and external factors compared to the basic neutral interest rate.” (Yonhap Infomax, 25.2.4)

You might think, “What kind of code is this?”, but I think it will be read if you understand the integrated policy system I mentioned earlier. It’s convenient to think that neutral interest rates are the most optimal interest rates that are most appropriate for the Korean economy. Considering the neutral interest rate, which is the optimal interest rate, the current growth and inflation, the base rate is a little high. For example, let’s assume that 2% of Korea’s base rate is appropriate considering growth and inflation. Currently, the Bank of Korea’s base rate is 3%… There’s a room to cut interest rates by another 1 percent. In a key currency country like the United States, you can raise expectations for a rate cut like this.

By the way, the neutral interest rate considering financial stability is higher than the neutral interest rate that is not. Considering household debt and exchange rate instability… It means that the appropriate interest rate should be about 2.5%, not 2%. So even if you lower the base rate, you can’t lower it from 3% to 2%. You can only lower it to 2.5%. Now that we’ve explained that, let’s read the previous quote again. You’ll get a rough idea.

If the Bank of Korea takes monetary policy based on an integrated policy operating system… Just in case it wasn’t… Isn’t the scope of the base rate cut inevitably reduced? If we were predicting the Bank of Korea’s base rate only by considering growth and inflation, wouldn’t it be like coming out of the quadratic equation and letting your guard down before going to the examination and meeting the quadratic equation? The interest rate on Korean government bonds remains quite low. There is a part where the cut in the base rate has been partially reflected… I’m also looking at a further cut in the benchmark interest rate, but… How much will we cut… In that regard, I think there may be a smaller cut than the market’s expectations.

What’s changed… And it’s important to take that into account and analyze the market. Today, we talked about the yen and the central bank’s integrated policy system. Essay line. Thank you.