Get real, BOJ rates are deeply negative: McGeever
(The opinions expressed here are those of the author, a columnist for Reuters.)
ORLANDO, Florida - Although the Bank of Japan is raising borrowing costs and Japanese Government Bond yields are the highest in 15 years, "real" inflation-adjusted rates in the world's fourth-largest economy are actually negative and the lowest in years.
Given how much has been written about the BOJ's 'historic' rate-hiking campaign and the recent spike in JGB yields, one might think policy conditions in Japan are tightening. But that's not the case.
The real official policy rate in Japan is currently -3.5%, the lowest in two years.
That's because annual consumer price inflation in Japan is now 4%, higher than in the United States, euro zone and UK. This accelerating inflation – something of a novelty in Japan – indicates that financial conditions in the country are still extremely loose, despite the apparent hawkish shift in monetary policy over the past year.
This discrepancy could have significant implications for Japanese - and global - markets.
OUTLIER
The BoJ is the notable outlier among G10 central banks as the only one raising rates, even if it is taking an understandably cautious approach after decades of deflation and extraordinarily loose policy.
The market has, in turn, developed a persuasive narrative: the BOJ swimming against the global tide will lift JGB yields, attract domestic and foreign capital, and turbocharge the yen. Given that Japan is the world's largest creditor nation with a net $3.3 trillion of assets held overseas, the yen's upside is potentially huge.
Some of this story is playing out. The yen is up more than 5% against the dollar this year, making it the best-performing G10 currency. But as Bank of America analysts neatly point out, real yields and rates complicate the picture.
REALITY CHECK
Last week, BofA raised its year-end forecast for the 10-year JGB yield to 1.65% from 1.40% and lifted its BOJ terminal rate forecast to 1.5% from 1.0%. The BOJ's policy rate is currently 0.5%, the highest since the Global Financial Crisis.
Yet the BofA analysts also expect to see the yen fall to 165.00 per dollar by the end of this year, which would be the weakest level in almost 40 years.
That's because real interest rates matter to investors and businesses.
Yen deposits have lost their real value at an annualized rate of 3.6% over the past three years, they argue. And Japan's real policy rate is currently a full 500 basis points lower than the equivalent U.S. rate, and 530 bps below the equivalent euro zone rate.
Even if Japan's inflation halves to 2% and the policy rate doubles to 1%, the real policy rate would be -1%, still well below equivalent U.S., UK and euro zone real rates, which are all positive. So Japanese households may be tempted to seek higher returns overseas.
For domestic real rates to become attractive, the BOJ would need to tighten policy sharply or inflation would need to start slowing soon. Or both.
Given the BoJ's caution and the stickiness of inflation, that's a real tall order.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Kirsten Donovan)
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Gulf Today
14 hours ago
- Gulf Today
Trump approves Nippon Steel's $14.9 billion purchase of US Steel
US President Donald Trump approved Nippon Steel's $14.9 billion bid for US Steel, capping a tumultuous 18-month effort by the companies that survived union opposition and two national security reviews. Trump signed an executive order saying the tie-up could move forward if the companies sign an agreement with the Treasury Department resolving national security concerns posed by the deal. The companies then announced they had signed the agreement, fulfilling the conditions of Trump's directive and effectively garnering approval for the merger. 'We look forward to putting our commitments into action to make American steelmaking and manufacturing great again,' the companies said in the statement, thanking Trump. They added the agreement includes $11 billion in new investments to be made by 2028 as well as governance, production and trade commitments. Nippon Steel will buy a 100 per cent stake in US Steel, a spokesperson for the Japanese company in Tokyo said on Saturday. The steelmakers provided no detail on the 'golden share' they pledged to issue to the US government, raising questions about the extent of US control. ' 'US Senator David McCormick of Pennsylvania, where US Steel is headquartered, said last month the golden share would give the government veto power over key decisions relating to the American steel icon. Reuters has reported that Nippon Steel would invest an additional $3 billion for a new mill after 2028. The takeover will set up the ailing US firm to receive the critical investment, allowing Nippon Steel to capitalise on a host of American infrastructure projects while its foreign competitors face steel tariffs of 50 per cent. The Japanese firm also avoids the $565 million in breakup fees it would have had to pay if the companies had failed to secure approvals. For Nippon Steel, the world's fourth-biggest steelmaker, securing a foothold in the US is key to its global growth strategy. The US steel market, including high-grade steel, Nippon Steel's specialty, is growing amid rising global trade tensions. Still, some Nippon Steel investors are concerned about short-term financial pressure due to the scale of the additional investment commitment. The Japanese government, rushing to try to secure a trade deal with the US by the time Trump and Prime Minister Shigeru Ishiba meet at the Group of Seven summit starting on Sunday, applauded the Nippon-US Steel agreement. 'The government of Japan welcomes the US government's decision, as we believe this investment will enhance innovation capabilities in the US and Japanese steel industries and further strengthen the close partnership between our two countries,' Economy, Trade and Industry Minister Yoji Muto said in a statement on Saturday. Friday's announcement was hardly guaranteed, even if many investors had seen approval as likely after Trump headlined a rally on May 30 giving his vague blessing to an 'investment' by Nippon Steel, which he described as a 'great partner.' Shares of US Steel had dipped earlier on Friday after a Nippon Steel executive told Japan's Nikkei newspaper that the takeover required 'a degree of management freedom' to go ahead after Trump said the US would be in control with the golden share. The bid has faced opposition since Nippon Steel launched it in December 2023. After the United Steelworkers union came out against the deal last year, both then-President Joe Biden, a Democrat, and Trump, a Republican, expressed their opposition as they sought to woo voters in the presidential campaign in the swing state of Pennsylvania. Shortly before leaving office in January, Biden blocked the deal on national security grounds, prompting lawsuits by the companies, which argued the national security review they received was biased. The Biden White House disputed the charge. The steel companies saw a new opportunity in the Trump administration, which opened a fresh 45-day national security review into the proposed merger in April. But Trump's public comments, ranging from welcoming a simple 'investment' in US Steel by the Japanese firm to floating a minority stake for Nippon Steel, spurred confusion. While many investors saw approval as likely after Trump headlined a rally on May 30 giving his vague blessing to an 'investment' by Nippon Steel, which he described as a 'great partner', Friday's announcement was hardly guaranteed. The bid, first announced by Nippon Steel in December 2023, has faced opposition from the start. Both Democratic former President Joe Biden and Trump, a Republican, asserted last year that US Steel should remain US-owned, as they sought to woo voters ahead of the presidential election in Pennsylvania, where the company is headquartered. Reuters
Gulf Today
a day ago
- Gulf Today
Trump's curveball at Japan tea giant's US expansion
Kentaro Okasaka and John Geddie, Reuters Top Japanese tea brand Ito En's latest push to win over health-conscious US customers with its traditional unsweetened brew has hit a new road bump: President Donald Trump's trade tariffs. The company, which splashed out on a tie-up with Major League Baseball star Shohei Ohtani and launched a less bitter tea to capture a bigger slice of the lucrative growth market, is now debating whether to hike prices or move some production across the Pacific, executives said in interviews with Reuters. The dilemmas facing Ito En can be found across Japan, the biggest foreign investor in the United States, as Tokyo's trade negotiators return to Washington this week to try and strike a deal to cushion the blow to its fragile economy. Makoto Ogi, Ito En's general manager of international business development, told Reuters the company may raise prices of its products in the US to compensate for Trump's 24% levy on Japanese goods set to come into force next month. The problem is their retailers and distributors may resist for fear of losing sales. "We may not be able to ask them to raise our prices despite what Trump is saying," he said. The last time Ito En raised prices in the US - by approximately 10% in 2022 - sales dropped by around 5%. The company said the decline reflected the price hike as well as factors such as COVID-19 that affected market conditions. The company is also considering making tea bags in the United States, and bottling drinks there rather than in Japan, Taiwan and Thailand as it does presently, Ogi and other executives explained during interviews in Tokyo. These details of the firm's potential plans to counter tariffs have not been previously reported. The executives did not disclose the costs of such moves. In its latest results released this month, Ito En reported its profit shrank by 8.2% in the year to April, but forecast an 11% jump this year. It set a modest 3.7% profit growth target for its US tea business, versus 20.7% growth achieved last year, an outlook partly related to tariffs, a company spokesperson said. Its shares rose to nearly a four-month high in the wake of the results, with its president later telling investors the forecasts were "conservative". Many Japanese firms have set up war rooms to chalk out plans to restructure supply chains or cut costs to offset tariffs and keep their US growth plans on track, said Mizuho Bank analyst Asuka Tatebayashi. A survey of 3,000 Japanese companies by export promotion organisation JETRO late last year before Trump's tariffs found the level of interest in US markets at the highest in nearly a decade, with food and beverage companies like Ito En the most enthusiastic. "When you talk to companies in Japan, the US comes first," said Tatebayashi, adding that they face shrinking domestic demand and are generally cautious about expanding into riskier emerging markets. For Ito En, the US has long been a market it is eager to crack. Five years ago, Joshua Walker, the newly-appointed head of U.S. non-profit Japan Society, hosted Ito En's North America head Yosuke Honjo in his New York office. Honjo gestured to the green-coloured bottles of their flagship 'Oi Ocha' brand lining the shelves and said he wanted them to spread around the world like Coca-Cola's red bottle. "It was refreshing. Japanese companies would not normally have ambition of that type of grandeur," said Walker, recounting the executive's previously unreported remarks. Honjo, via a company spokesperson, confirmed the remarks. Founded in the 1960s by Honjo's father and uncle, Ito En has grown to dominate Japan's tea market, using around a quarter of the country's total crude tea production. Since expanding into the US in 2001, it has dabbled in selling sweet and flavoured tea varieties familiar to Americans. But more recently it has focused on the unsweetened tea popular in its home market, hoping to tap health-conscious customers and a boom in Japanese food and cultural exports. Honjo said growth has also been aided by a sharp rise in Asian Americans, estimated at nearly 25 million in 2023, or around 7% of the U.S. population, according to the Pew Research Center. Japan's exports of green tea surged 24.6% to 36.4 billion yen ($251 million) last year, with nearly half destined for the United States, official data showed. Some equity analysts like Jiang Zhu of Tokyo-based rating agency R&I have highlighted the high marketing cost of Ito En's international push at a time it faces tough competition at home from tea brands such as Coca-Cola's Ayataka. The company said it has around a 2% share of the US market for tea beverages, ranking eighth largest, with Unilever's Pure Leaf leading the sector. But it has a long way to catch up with the 3.9 billion gallons of Coca-Cola's trademark Coke drinks sold in the US last year, at only 3.1 million gallons by comparison, according to research firm Beverage Marketing Corporation. "Kikkoman's soy sauce is probably in every American household now, but it took about 50 years for it to become a part of the culture," said Akihiro Murase, Ito En's public relations manager, referencing the Japanese food manufacturer as a template for success. "We are not there yet but we would like to make unsweetened green tea a part of the food culture," he said.
Al Etihad
2 days ago
- Al Etihad
Stocks tumble, oil prices jump after Israel attacks Iran
13 June 2025 15:59 LONDON (Reuters)World stock markets tumbled on Friday and oil prices surged as Israel launched a military strike on Iran, sparking a rush into safe havens such as gold, dollar and Swiss escalation adds uncertainty to financial markets at a time of heightened pressure on the global economy from US President Donald Trump's aggressive and erratic trade on Friday Trump urged Iran to make a deal over its nuclear programme, saying that there was still time for the country to prevent further conflict with reaction, which had abated in early European trade, gathered a renewed momentum as the session wore crude oil prices were last up almost 9% at $75.54 per barrel, having jumped as much as 14% during Asian hours. They were set for their biggest one-day jump since 2022, when energy costs spiked after Russia's invasion of oil futures rose almost $6 to $ a classic safe-haven at times of global uncertainty, rose 1% to $3,416 per ounce, bringing it close to the record high of $3,500.05 from launched large-scale strikes against Iran on Friday, saying it had attacked nuclear facilities and missile factories in what could be a prolonged operation to prevent Tehran building an atomic said it had no part in the developments mean another major geopolitical tail risk has now become a reality at a time when investors are wrestling with major shifts in US economic and trade policies. TWO-WAY PULL FOR BONDS US Treasuries initially benefited from the rush for safer assets, but as the day wore on focus turn to the inflationary impact of 10-year Treasury yields were last up 2.6 basis points (bps) at 4.38%, having touched a one-month low of 4.31%. Bond yields move inversely to 10-year bond yield touched its lowest level since early March at around 2.42%, before also moving traders were attracted to the dollar as a haven, with the dollar index up 0.8% to 98.50, retracing most of Thursday's sizeable Swiss franc briefly touched its strongest level against the dollar since April 21, before trading 0.5% lower at around 0.8144 per safe haven the Japanese yen fell 0.6% to 144.33 per dollar, giving up earlier gains of 0.3%. The euro was down 0.8% at $1.15, after rising on Thursday to the highest since October 2021. Stock Markets Continue full coverage
