A strategist claims that Japan’s current system of exceptionally low interest rates has been inappropriate” and very harmful for the economy, forcing the country to adjust to a new normal earlier than anticipated.
Japan has kept its base rate at -0.1% since 2016, while central banks across the world aggressively raised interest rates to curb inflation.
Time to Embrace Change, Says Strategist
Global investment strategist at TD Epoch Kevin Hebner said on Monday’s Squawk Box Asia on CNBC that the sooner the BOJ adopts a more regular structure and lets bond and equities markets do the work they must do, the better for the financial markets.
On Friday, the Bank of Japan shocked the financial markets by lowering its yield curve control (YCC) while keeping interest rates at historically low levels.
The central bank said that it would now offer to purchase 10-year Japanese government bonds at a fixed rate of 1.0% rather than the prior rate of 0.5%.
The BOJ effectively raises its tolerance by 50 basis points as a result, indicating that it will permit a rise in the 10-year yield of up to 1.0%.
The kind of policy they’ve had in place for some time, according to Hebner, “made sense in the mid- to late ’90s.”
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Japan’s Cyclical Issues and the Impact of Negative Interest Rates
This policy has been improper for 20 years. He claimed that Japan has not experienced the same cyclical issues. Furthermore, I think all kinds of distortions and dislocations are very harmful when interest rates are zero.
Moving away from negative interest rates would have a substantial influence on the Japanese economy, both on business investment and consumer savings.
For equity investors, it is critical to understand that the cost of capital is no longer zero.
over enterprises to succeed in the medium and long terms, the cost of capital must be reasonable, which it hasn’t been over the previous 20 years.
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