Can raising interest rates really stop the yen's depreciation and high prices?
Why did the yen depreciate even after an interest rate hike?
Generally, when a country’s interest rates rise, its currency becomes easier to buy. This is because holding assets in a currency with higher interest rates allows for the expectation of higher yields.
Therefore, it is easy to imagine the movement: Bank of Japan raises rates -> Japanese interest rates rise -> yen is bought -> yen appreciates.
However, this time, after the Bank of Japan raised rates to 1.25%, the yen was sold instead. At one point, the yen weakened to the 158 yen per dollar level.
Why is that?
One reason is that the rate hike to 1.25% itself had already been anticipated by the market. In financial markets, money moves based on expectations of what will happen next even before the moment the news is actually released.
Regarding the September rate hike, it was already quite priced in by prior market expectations.
Therefore, what the market was looking at was not
“whether they would raise rates this time,” but
“whether they will continue to raise rates at a fairly rapid pace after this.”
The “7 to 2” vote that concerned the market
The Bank of Japan’s decision this time was not unanimous.
Out of the nine policy board members,
seven voted for the rate hike, and two voted against it.
The rate hike itself was carried out.
However, from the market’s perspective,
it could also be interpreted as “there are cautious views within the Bank of Japan about rushing to raise rates any further.”
Furthermore, Governor Ueda did not provide a clear schedule for future rate hikes.
He maintained a stance of making decisions while monitoring prices and the economy.
The United States is also raising interest rates
On September 16, the FRB also raised its policy interest rate to 3.75–4.00%. It is not just Japan that is raising rates.
Even if Japan raises rates from 1.00% to 1.25%, U.S. interest rates are still in the high 3% to 4% range. The interest rate gap between Japan and the U.S. remains large. Moreover, the FRB has indicated the possibility of further rate hikes in the future.
Even if Japan raises rates by 0.25%, if the U.S. raises rates in the same way, the interest rate gap will not easily narrow.
The next problem is where to stop
With rate hikes progressing this far, the next concern is
not just “will they raise rates again?”
I think the issue is where they will stop raising rates.
If interest rates are kept low, there is a possibility that the yen’s depreciation and inflation will continue. But if they are raised too much, it will place a burden on home loans, corporate borrowing, capital investment, consumption, and stock prices.
Raising interest rates is not an end in itself.
The problem is,
how much of an interest rate can the Japanese economy withstand?
And what level does the Bank of Japan consider to be a “normal interest rate”?
Looking at the yen exchange rate this time, I feel one thing.
What moves the economy may not be just the announced numbers themselves, but the expectations for what lies beyond them.
Rather than the “present” where the Bank of Japan set the rate at 1.25%,
is the next step 1.5%?
Or will it stay at 1.25% for the time being?
The market is already looking beyond that.