Goldman Sachs: Japan’s Central Bank may have to revise the interest rate
At the end of 2022, the Bank of Japan announced a revision of bond yields. It is about the possibility of expanding the permitted range within which yields on financial instruments can fluctuate. According to Goldman Sachs analysts, such innovations are only the first step in changes by the Japanese regulator. The next decision could be to raise interest rates to get them out of the negative territory.
The Central Bank puts emphasis on improving the work of the government bond sector. The desire of the regulator to improve its functioning may be a sign that the government is ready to leave the low level of interest rates, which have not been revised for a long time. According to experts, such a decision will allow for more control over the yield spreads. In addition, the Central Bank has already made the necessary adjustments, which should stimulate the local market.
The regulator raised the permissible level of yield for long-term investments to 0.5%, the new figure is 2 times higher than the previous range. At that, the Central Bank left unchanged the short-term rate, which is zero. The size of the yield for 10-year bonds is also unadjusted – at -0.1%.Despite Goldman Sachs’ forecasts, the Central Bank governor said there’s no need to raise interest rates yet, with the current changes designed to stimulate the bond market and make them more functional amid today’s global challenges. So far, the regulator has no plans to further expand the range of yields, but in the future, it is possible that the bank will loosen its control over the yields on these financial instruments.
It should be noted that the Japanese debt market has always been somewhat isolated from global processes. This situation can have both positive and negative effects on domestic processes. It puts pressure on local banks, which makes their development more difficult.
Another factor affecting the market is the weak yen. In the past, this peculiarity could be considered a positive factor for the Japanese economy, which is considered one of the largest exporters in the world. However, the situation has changed in recent years.
The weakening of the national currency against the dollar has caused investors from the United States to lose interest in the Japanese market. In 2022, Japan’s main Topix index had almost the same returns as the S&P 500, so many players preferred to invest in U.S. stock exchanges. Overall, the yen lost 15% of its value against the dollar in 2022, and foreign investors dumped about $16 billion worth of Japanese stocks.