'Noto Gangjin' Earthquake's Negative Impact on Japan's Economy... Delay in Ending Negative Interest Rates?

Mayor Expects Interest Rate Policy Shift as Early as This Month
Tightening Policy Shift Unlikely in Gangjin

Japanese earthquake [Image source=Yonhap News]

On the 1st, a magnitude 7.6 earthquake struck the Noto region of Ishikawa Prefecture, Japan, raising expectations that the Bank of Japan (BOJ) may delay ending its negative interest rate policy. Household consumption and corporate activities could already be weakened due to the earthquake's aftermath, and premature tightening policies might negatively impact economic stimulus. As the BOJ is expected to maintain its monetary easing stance for the time being, the yen is showing weakness again.

On the 4th (local time), Bloomberg reported Morgan Stanley MUFG Securities' outlook that the BOJ will find it difficult to change its negative interest rate policy stance in the first half of the year due to the strong earthquake in the Noto region. The quake, which caused at least 78 deaths, makes it hard to shift monetary policy before assessing its negative impact on the Japanese economy. The nearby thermal power plant stopped operations, causing disruptions in power supply, and some factories are experiencing difficulties in product manufacturing. Mitsubishi UFJ Morgan Stanley Securities predicted that the BOJ is likely to maintain an accommodative monetary policy at least until April.

Until now, the market expected that Japan would soon end its negative interest rate policy as inflation approached the 2% target. This outlook became stronger after BOJ Governor Kazuo Ueda said at the Japan Business Federation event on the 26th of last month, "If the virtuous cycle between wages and prices strengthens and the possibility of achieving a continuous and stable price target becomes sufficiently high, we can consider policy changes."

Some have suggested that the BOJ might raise policy rates starting this month. Daisuke Karakama, Chief Market Economist at Mizuho Bank, said, "Even if many foreign investors expect the negative interest rate to end in January, it is almost impossible under these circumstances." He added, "It is not even certain that the negative interest rate policy will end in the first half of 2024."

Marie Iwashita, Chief Market Economist at Daiwa Securities, who had forecasted the BOJ would end negative rates this month, said, "(Due to this strong earthquake) that seems impossible." Concerns that production activities may shrink due to the earthquake mean the government is likely to prepare an additional budget for disaster recovery. He expects that the negative interest rate policy may only change in April.

The yen's value against the dollar is declining. The yen-dollar exchange rate, which was 141.13 yen on the 1st, rose to 143.74 yen as of the morning of the 4th. Bloomberg explained, "This is a different pattern from the Great East Japan Earthquake in 2011." At that time, the magnitude 9.0 quake led Japan to convert overseas investment assets into yen, causing the yen to strengthen. In October 2011, the yen-dollar exchange rate hit a record low of 75.35.

Economist Daisuke emphasized, "The situation is different now." He explained that Japan had accumulated trade surpluses over several years after the Great East Japan Earthquake, and corporate demand for yen supported the yen's appreciation. He stated, "Japan is currently in a deficit. Expecting the yen to strengthen due to the earthquake is unreasonable."

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