A decision by Haruhiko Kuroda, Bank of Japan’s governor, to put almost $3.5 trillion of Japanese money into the global investments changed the financial markets around the world. Now, the new BOJ head, Kazuo Udea, seems to be indicating there will be an end to the extreme low interest rates.
All of which could cause a negative impact on the world economy. Those ten years of low interest rates penalized domestic savers and pushed Japanese money overseas. Starting in 2016, the rush to opportunities outside of Japanese markets grew faster, ultimately creating huge offshore investments, worth more than 60% of Japan’s economy.
Under Ueda, everything runs the risk of failing. Just as other countries are already experiencing higher interest rates that are upsetting the global banking system and endangering financial stability. Japanese investors, who are the largest foreign holders of US government bonds, they also control a wide range of dangerous loans, Euro energy investments and Brazilian debt.
The fluctuations in the global bond markets, which are already being shaken by the Fed’s battle to fight inflation, might be amplified by a hike in Japan’s borrowing costs. Considering recent bank upheaval in the US and Europe, the BOJ’s stricter policy is anticipated to increase scrutiny of Japan’s lenders.
A change in policy in Japan should not be underestimated. The flow is already being reversed. A record amount of foreign debt was sold by Japanese investors last year as local yields increased amid expectations that the BOJ would relax policy.
As he slightly loosened the central bank’s hold on yields in December, Kuroda fueled the flames. In a matter of hours, the yen surged and Japanese government bonds fell, causing a ripple effect that affected everything from Treasuries to the Australian currency.
Japanese money is already being repatriated, avoiding risk in foreign exchange.
Betting on a changes in BOJ policy have become less popular recently as the turmoil in the banking industry increases the likelihood that decision-makers would put financial stability first. Investor fear that some of the pressures that have brought down US banks like SVB has increased the scrutiny of the balance sheets of Japanese institutions.
Yet market participants anticipate that once tensions subside, discussion of BOJ changes would pick up again.
According to data from the central bank, the BOJ has purchased 465 trillion-yen ($3.55 trillion) worth of Japanese government bonds since Kuroda started quantitative easing a decade ago. This has driven down yields and caused unheard-of distortions in the market for sovereign debt. In order to look for better returns elsewhere, local funds sold 206 trillion yen of the securities during that time.
Japanese investors now hold the largest amount of US Treasury securities outside of the US as well as around 10% of Australian and Dutch bonds. According to calculations by Bloomberg, they also possess 7% of Brazil’s debt as well as 8% of New Zealand’s securities. Over the last decade Japanese investors have spent 54.1 trillion yen on international shares.
The yen reached a 32-year low last year, but as the currency pulled back over the past 12 months, normalization seems probable.
Japanese investors have even more motive to return home when the massive global bond losses from the previous year are taken into account.
Undoubtedly, not many are willing to stake all on the possibility that Ueda may upset the status quo once in government.
According to a recent Bloomberg survey, 41% of those who follow the BOJ expect a tightening move in June, up from 26% in February, while former Japan Deputy Finance Minister Eisuke Sakakibara suggested that the BOJ may hike interest rates by October.
A summary of Bank of Japan’s meeting on March 9–10, 2023 revealed the institution is still wary of making a policy change before hitting its inflation objective. Even though Japan’s inflation rate increased over 4% and to a new four-decade high.
All the indications are Japanese money is moving back home and it will have a ripple effect across the global economy.
