[Turning Point Approaches] Will Japan Abandon 'Datsu Abenomics' and End Monetary Easing Policy?

Policy Change Expected Ahead of April BOJ Governor Change
Market on Alert for Interest Rate Hike, Also Hopes for Economic Rebound

[Image source=EPA Yonhap News]

[Asia Economy Reporter Jeon Jinyoung] Despite the global trend of interest rate hikes, Japan, which had insisted on an ultra-low interest rate policy known as "Abenomics," reached a turning point in its monetary policy direction this year as it hinted at an interest rate increase at the end of last year.

While major countries such as the United States and Europe raised interest rates, the Kishida Fumio Cabinet, which had maintained a solo quantitative easing policy, shifted its policy as the domestic and international economic conditions surrounding Japan worsened. Along with changes in monetary policy following the appointment of the next Bank of Japan governor this year, expectations for a possible economic rebound are emerging.

◇Even a New Term ‘Bad Yen Depreciation’... Eventually Touching Interest Rates

[Image source=Yonhap News]

The Bank of Japan (BOJ) decided on the 21st of last month to widen the fluctuation range of the 10-year government bond yield from the existing 0.25% to 0.5%. This policy shift, which effectively abandons Abenomics, attracted keen interest from central banks worldwide as well as the market.

BOJ Governor Kuroda Haruhiko repeatedly emphasized, "This measure is not an interest rate hike," urging caution against overinterpretation. However, the market effectively read it as an interest rate increase. According to the Nihon Keizai (Nikkei) newspaper, Adachi Masamichi, Chief Economist at UBS Securities, said, "No matter what the BOJ says, this decision is a step toward an exit strategy," adding, "It leaves open the possibility of a policy rate hike after the new governor takes office next year."

The global market also reacted to Japan’s move as an interest rate hike, causing turmoil. This is because Japanese investors might withdraw large amounts of funds to their country where interest rates are rising. Immediately after the BOJ’s yield fluctuation adjustment, government bond yields in major countries such as the US, UK, and Europe surged. Bloomberg News referred to this as the "Kuroda Shock." Especially since Japan is the largest holder of US Treasury bonds, the impact on US Treasuries was significant.

◇‘True Tightening’ Depends on Next Governor... Market on Edge

[Image source=Reuters Yonhap News]

The "Kuroda Shock," which shook the entire Japanese economy, is analyzed as a gift for the next governor. It sends a small signal of shifting from the easing stance that has lasted for years to tightening, and is a measure to resolve market concerns within Kuroda’s term. If this happens, the next governor can confidently pursue policy changes.

The market’s attention is focused on the candidates mentioned as the next Bank of Japan governor. Governor Kuroda’s term lasts until April next year, and depending on who is appointed, the future policy stance of the BOJ can be anticipated.

Currently, the candidates mentioned as Kuroda’s successors are Amamiya Masayoshi, the current BOJ Deputy Governor, and Nakaso Hiroshi, former BOJ Deputy Governor. However, since it is expected to be difficult to deviate significantly from the Abenomics line, there is speculation that the Kishida Cabinet, which needs policy changes, might introduce a third figure.

Kyodo News reported, "Prime Minister Kishida will revise the joint statement made between the Abe Shinzo administration and the Bank of Japan in 2013 in line with the appointment of the new governor." The joint statement aims to realize the values of Abenomics such as ultra-low interest rates, so revising it essentially means breaking away from Abenomics.

◇Gentle Breeze of Optimism Also Emerging

[Image source=AP Yonhap News]

Meanwhile, some cautiously express expectations that this interest rate hike, the first in 15 years, could be an opportunity for Japan to escape economic stagnation and aim for an economic rebound.

Households are expected to see an increase in interest income. Naoki Hattori, a researcher at Mizuho Research, said, "Considering the deposit interest income resulting from the end of negative interest rates and the rise in interest rates, the interest rate hike is likely to have a positive impact on households overall." Under the negative interest rate policy, the ordinary deposit interest rate at Japanese banks was about 0.001% per annum, meaning deposits practically earned no interest.

It could also stimulate companies. Japanese companies have relied on the "yen depreciation" and have been somewhat reluctant to innovate, but with the policy shift, they will need to actively pursue competitiveness.

This content was produced with the assistance of AI translation services.