Japan's Economic Shift: The Bank of Japan Moves Away from Negative Rates | Episode 111 | 03-19-2024

Chief Investment Officer, Megan Horneman,  breaks down the latest market developments in this episode of Markets with Megan. Today, we witnessed a significant shift as the Bank of Japan ended its negative interest rate policy, marking the conclusion of an era. Megan discusses the reasons behind this move, citing factors such as achieving the 2% inflation target and concerns about wage growth. Despite the anticipated impact on the yen, the market reacted cautiously due to the Bank's dovish tone regarding future rate hikes. Megan also explores the implications for various sectors, from banks to real estate and tourism, as Japan enters positive interest rate territory. Stay tuned for more insights on central bank actions and economic data in upcoming episodes, and don't hesitate to reach out with your questions or comments at podcast at Verdence dot com.

Well, folks, it's finally happened. Today, we saw the end of the negative interest rate policy by the Bank of Japan. It is Tuesday, march 19th, and this is Markets with Megan. I'm Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, and this morning this was a much anticipated move by the Bank of Japan, but they were the last man standing, we like to call it, with the negative interest rate policy that we've seen over recent years.

If you recall, back in 2016, the Bank of Japan implemented a negative interest rate policy and also a yield curve control, where they kept a cap on 10-year Japanese government bonds. Today, they put an end to that and we're going to discuss a few reasons why. First of all, their inflation has finally reached their 2% target. It looks like businesses are passing on price increases to consumers. So the inflation they've finally gotten out of the deflationary era that we've seen in Japan. The other reason is there are a bit concerned about wage growth. We've seen an increase in both wage growth. This at wage growth at the nominal and the real level. But we are also seeing that the some of the biggest labor unions in Japan are going to be implementing the biggest pay increases that we've seen in decades. So this is concerning to the Bank of Japan. Another reason why they did this Now they're not this was widely anticipated.

Markets have been setting up for this. The other two things that they also announced is that they would slow their purchases or, I'm sorry, discontinue their purchases actually of exchange traded funds and Japanese REITs. What does this mean for the markets? First of all, the yen. We had anticipated would be the biggest beneficiary of this. Not a huge move today, primarily because they put this out there, but they also, with their comments, gave a bit more of a dovish tone, saying hey, just because we did this doesn't mean that we're going to be aggressively raising rates, like we've seen by the Federal Reserve. Instead, they're going to take this meeting by meeting and look at the economic condition. So the market was a little relieved by that.

There's lots of things that can you know. The banks, primarily, will be a bigger beneficiary in Japan. As we get rid of this negative interest rates. We can see some increases in their savings. But we are going to watch the homeowners, the real estate sector, the tourism industry, because the yen should eventually benefit from this. These are some of the areas that we think could lag in the future as the Bank of Japan continues at a moderate pace with this positive interest rate territory. That's all we have today. It's a ton of information this week from central banks, so we'll be back tomorrow to talk about the Federal Reserve with the Bank of England as well this week and a bunch more economic data that will come out and discuss. That's all we have. I'll be back again. Thanks so much. If you have any questions or comments, please feel free to reach out to podcast at Verdence dot com. Thank you.