Japan's Rate Hike: Self-Necessity or Aiding Dollar's Harvest?

2024-08-25 145 Comments

The Bank of Japan is set to begin its interest rate meeting tomorrow, on March 18th and 19th, and the market widely expects that this time the Bank of Japan will end its negative interest rate policy, which means Japan is about to start raising interest rates.

This expectation is primarily driven by the outcome of Japan's spring labor-capital negotiations. News emerged on March 15th that Japanese labor unions have secured an annual wage increase of 5.28%, marking the largest raise in three decades.

With inflation and wages on the rise, it is quite natural to adjust the negative and zero interest rate policy that has been in place for 17 years, ending the era of easy money. Today, we will mainly discuss the impact of Japan's interest rate hike on the global economy.

Our topic has two options: Is it a self-need or assistance in dollar harvesting? This has a sensationalist tone. Subjectively, it is certainly the need of the Japanese economy to raise interest rates. However, objectively, it does indeed take over from the dollar. While the dollar continues to maintain high interest rates, the tightening of the yen will make the global cash pool even more tense, effectively assisting in the dollar's harvesting role.

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In the second half of last year, Japan's inflation once reached four percentage points, even higher than that of the United States in a short period. By the end of last year, while the United States had dropped to 3.2, Japan was at 3.4. At the same time, the United States' interest rate was at five percentage points, while Japan's was at zero. Since the United States started raising interest rates, the yen has continued to depreciate, ranking first among major currencies with a depreciation exceeding 40%.

Japan is resource-poor and has to import everything, and such a drastic currency depreciation directly led to Japan's imported inflation, pulling Japan out of three decades of deflation.

In such a situation, an interest rate hike is necessary. If you ignore it, inflation will spiral upwards, especially since Japan has maintained an easy monetary policy for twenty years, with a large amount of money in a dormant state. Once inflation activates them and they flood into the market, it might become uncontrollable.

Therefore, Japan's interest rate hike is primarily a self-need, with no conspiracy theory involved. Anyone would have to raise rates; it's just a matter of the magnitude and speed of the increase.

But it is precisely this difference in magnitude and speed that reveals the nature of Japan's interest rate hike. If Japan raises interest rates quickly and aggressively, rapidly bringing them to two or three percentage points, it would reveal that Japan is an accomplice of the United States, willing to destroy itself to help its master complete the harvesting task.However, I believe this is unlikely. The Japanese are shrewd, and while it's true that they are America's lapdog, they can bark for their master without issue. But to sacrifice themselves to the point of being cooked for their master's fullness, Japan is still unwilling to do so. This dooms its interest rate hikes to be small and slow, and the overall impact won't be too significant. The effect on major countries is minimal, but the impact on smaller nations is greater.

The US dollar, euro, and yen are the top three currencies in the world's investment fields. The US dollar's power of interest rate hikes in the past two years is evident, as it has tightened global liquidity. The euro is also significant but mainly circulates within the EU. In fact, the yen, scattered around the world, ranks second. The US dollar, this pump, has now stopped, and the yen, the second-largest pump, has started working.

Although Japan is destined to take small steps in interest rate hikes, we cannot solely focus on interest rates when looking at liquidity. If Japan raises interest rates, even if it's just by 0.5% at most, it's ten times less than the US's 5% interest rate, almost negligible. On the surface, it seems that it won't attract funds to chase the yen.

But as soon as Japan announces the end of its easy monetary policy and the start of interest rate hikes, even if the increase is minimal, it will create expectations for the yen's appreciation. And currency fluctuations can easily achieve more than a 5% return. For example, if the current exchange rate of yen to US dollars is 150, and Japan says it has raised interest rates, then a short-term rise to 140 is very realistic, and the mere expectation in people's minds is enough.

From 150 to 140, the increase is 6.6%. What can you do to make a 6% profit in a short time? So this is a very critical issue. People chase the yen for the sake of exchange rate differences, which in turn promotes the appreciation of the yen, forming a positive incentive and accelerating the yen's liquidity absorption.

This is the fundamental reason why Japan's interest rate hikes are so closely watched. As for how much it increases, it doesn't matter; as long as it increases, that's fine.

So, as the yen begins to absorb liquidity, who will be most affected? It depends on which countries have the most Japanese capital that can be easily withdrawn.

Let's start with Mainland China. In fact, there is no small amount of Japanese capital in Mainland China, but much of it is in the manufacturing industry, which is not easy to move. There is also some Japanese capital in the financial sector. Although it has good liquidity, capital is not foolish; it is also betting on the appreciation expectation of the renminbi. In the long run, the appreciation expectation of the renminbi is greater than that of the yen. What if it runs blindly?

So I believe the impact on the mainland is not significant. However, the impact on the A-share market may be transmitted through the Hong Kong stock market to some extent.

The Hong Kong dollar is hard-pegged to the US dollar. If Japan raises interest rates, the yen will definitely appreciate against the Hong Kong dollar, which will affect the Hong Kong stock market because there is no small amount of Japanese capital in the Hong Kong stock market, and the impact is inevitable.However, the overall impact on the stock market is not significant, as the current A-share market is primarily driven by endogenous factors. Compared to the policy tools of the management, the influence of the yen is negligible.

The impact may be greater on Southeast Asian countries, such as Indonesia, Thailand, and Vietnam. These countries have absorbed a considerable amount of Japanese capital in recent years. Their capital controls are not as strong as those on the mainland, and their national reserves are limited. If Japanese capital withdraws, they are likely to be targeted by short sellers.

The European Union (EU) may also be affected more than mainland China. According to statistics from the Japan External Trade Organization, between 2016 and 2022, Japan's investment in Europe accounted for 31.8%, while its investment in the United States accounted for 29.1%, and its investment in Asia only accounted for 23.7%, which has declined compared to the past. After 2000, influenced by changes in the international political and economic landscape, Japan's investment in Europe has significantly increased, surpassing the United States to become the primary destination for Japan's foreign investments.

So, when Japan raises interest rates, we can just sit back and watch the spectacle. It's uncertain who will cry and who will laugh. I personally hope that the impact of Japan's tightening will be more significant, ideally causing some turmoil in Southeast Asian countries and Europe. Then, guess who they will turn to for help?

Of course, they will seek assistance from the United States and China. Capital from both the U.S. and China will take advantage of the situation to enter these countries. In the past two years, when the U.S. raised interest rates, Chinese capital seized the opportunity to enter certain areas. The same will happen with Japan's interest rate hike. For major countries with ample capital, this is an opportunity.

Over the years, China has been深耕ing in Southeast Asia and has achieved a solid foundation. However, Japan entered earlier and has deeper roots than China. In the past, when Japan was loose, there were few opportunities for China. Now that Japan is actively tightening, it is voluntarily giving up some positions. I hope the Chinese can actively seize these opportunities. Southeast Asia is truly very important for China.

As for Brazil, it will also be deeply troubled by Japan's interest rate hike. Interested friends can research the relationship between Brazil and Japan, but we won't delve into it much in this program. Fortunately, with Lula in power in Brazil, China has the opportunity to further deepen its ties with Brazil.

Some may wonder about the impact of Japan's interest rate hike on the United States. In my opinion, there's no need to worry. Although Japan's investment in the U.S. is the second-largest, the idea that Japan could influence the U.S. is a pipe dream. If Japan can be spared less by the U.S., it would be considered a stroke of luck.

Whether Japan raises interest rates or not, it cannot escape being at the mercy of the U.S. Take Warren Buffett as an example. We will find that the U.S. plays with Japan as if it were a child.

Buffett started buying stocks of Japan's five major trading companies as soon as the U.S. raised interest rates, in 2022. At that time, the dollar was valuable. Instead of using his own dollars, Buffett went to Japan to issue bonds and borrow yen.Buffett used his own credit to issue medium to long-term yen bonds, with maturities ranging from 5 to 30 years. The interest rates at the time of issuance were absurdly low, with a 5-year loan interest rate of only 0.17%, and a 30-year rate of just 1.1%.

These interest rates are impossible for him to borrow at now. Those who bought Buffett's bonds are considered to have had a stroke of bad luck. The more Japan raises interest rates, the more Buffett's bonds plummet. This is the first cut.

However, Buffett has already borrowed the money, approximately $20 billion, and bought shares in Japan's five major trading companies. These stocks have now basically doubled, with the better performers having tripled. This is the second cut.

Buffett will definitely make a profit and run, but as for when to run, he won't just look at stock prices. He will also consider exchange rates. When he feels that the yen's exchange rate and stock prices are about right, he will leave. He wants to make money not only from your stocks but also from the appreciation of the yen due to interest rate hikes in Japan. This is the third cut.

Whether you lower or raise interest rates, he makes money from you. How can you compete with him? It's like playing with a child, isn't it?

As for whether Japan's economy has really picked up, it depends on how you look at it. In my opinion, it's the same for Japan, the United States, and even China. It all depends on your perspective.

Japan, the United States, and China all have their good sides, such as China's GDP growth data of 5.2%, the United States' non-farm employment numbers that are absurdly good, and the increased profits of large Japanese companies. They all look good on the surface.

However, the number of delivery personnel and designated drivers in China is increasing, and even young mothers with children are delivering food. The number of homeless people on the streets of the United States is also increasing, and the number of female leads in Japanese adult films is increasing as well, with the quality getting better and better. What do you say about this?

The world is a big stage, and it doesn't mean that anyone is doing well. By looking at the essence through the phenomenon, no one is doing well right now. It all depends on who can hold on.

Well, this is the yen interest rate hike. Some people see it as a bearish factor and damage, while others see it as an opportunity and wealth. In fact, everything in the world is the same. It's best to use a dialectical perspective, a more macro one, and combine it with your own situation to seek benefits and avoid harm, not to go with the flow, and not to follow the crowd. This is the right path.

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