Japan Hikes Rates, Reshaping Carry Trade

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio News.

David Gura (0:10)

It's been a huge week for central banks around the world.

SPEAKER_3 (0:13)

For the first time ever, the Federal Reserve, European Central Bank, and Bank of Japan have all raised interest rates in the same month.

David Gura (0:21)

Central banks are hiking rates to fight inflation, and on Friday, the Bank of Japan joined the club.

Paul Jackson (0:27)

What we're seeing here is a milestone for Japan's comeback onto the global stage.

David Gura (0:33)

Bloomberg's Paul Jackson covers Japan's government and economy out of Tokyo.

The BOJ held borrowing costs at or close to zero for three decades. It began increasing rates about two years ago. Today's 25 basis point rate hike continues that trend, but it comes with big risks that harken back to the early 90s.

Paul Jackson (0:53)

Now, what happened then?

The Bank of Japan raised interest rates so quickly that the stock market elapsed. And it took more than three decades to recover. And it heralded the start of decades of stagnation.

David Gura (1:09)

It's not just the Japanese economy that's at stake here. Japan is a key player in global markets, and it's the fourth largest economy on the planet.

That means that even small movements in interest rates in Japan can have big effects on the rest of the world, including the United States.

Paul Jackson (1:26)

You know, one thing that you can see with these movements is once the kind of tide turns, the momentum can move quite quickly. And if it does so, then you'd see quite a bit of strengthening in the end over the coming months.

David Gura (1:44)

This is The Big Take from Bloomberg News. I'm David Gura. Today on the show, what higher interest rates and a more expensive yen could mean for Japanese consumers, global markets and the lifeblood of the global economy, those all-important US government bonds. My colleague, Juan Ha, who hosts The Big Take Asia, talked to Bloomberg's Paul Jackson earlier today, hours after the BOJ hiked rates.

K. Oanh Ha (2:14)

Now, the Bank of Japan just increased its base rate a quarter point to 1.25 percent. Paul, you're there in Tokyo.

How are investors and consumers reacting to the move?

Paul Jackson (2:25)

If you're an investor in any of the mega banks in Japan, this is good news because how do banks make money? Well, one of them is through borrowing and lending money. So if you've got the interest rate higher, banks usually do well. So the big mega banks, those stock prices will all be going up. So if you're investing in those, it's good. But essentially, it feeds in to the idea that Japan's economy is back and Japan is a place to invest in again. Now, if you go to consumers, well, let me ask you the question. Are consumers anywhere in the world happy when interest rates go up? Well, usually no.

K. Oanh Ha (3:06)

Now, the Bank of Japan Governor Kazuo Ueda says this rate hike is about upside risk. So inflation, in other words.

What's the inflation picture in Japan like right now?

Paul Jackson (3:18)

If you look at the inflation picture now, it's looking a lot more subdued than it did when we're in like 2023, when inflation is over 4%.

At the moment, the inflation is actually below the 2% target of the Bank of Japan. So it might be a little bit subdued now, but economists at the Bank of Japan are all kind of thinking it's going to be above 3% as we get into early next year. So, you know, a lot of economists always say you got to get ahead of the curve on inflation because once you get to high levels of inflation, it becomes difficult to bring them down.

K. Oanh Ha (3:56)

Now the word that probably best describes the Japanese economy for the last 30 years or so is stagnation. The Bank of Japan kept rates around zero for most of that time to try and stimulate the economy. But recently things have changed, right? Base interest rates have risen over the last two years to 1 percent.

So I want to ask you, Paul, what state is the Japanese economy in today?

Paul Jackson (4:19)

Well, a lot of people like to say Japan is back. And in many respects, Japan is back. We do have inflation again. We do have yields going up that aren't being manipulated by the country for its economic policy. We have stocks going up and the nation becoming like a destination for investment. So in that respect, Japan is back. However, if you look at the economy in detail, is there evidence that we have a really fast growing economy now that's materially different to how it was a decade ago?