Following on last Friday’s announcement that the Bank of Japan would be holding interest rates steady but will eventually lowering the purchase volume of JGB’s, top Japan analysts took to the airwaves to opine how the rest of 2024 could look for JGBs and the yen.
When analysts refer to consumers, property buyers and renters are included in that word too hence the extensive coverage.
Why does the BOJ interest rate and JGB bond purchases matter to Japanese real estate?
This matters in a number of ways. Should the BOJ raise interest rates then there would be a knock-on, upward effect on mortgages, potentially softening a buyer pool already under household pressure due to inflation caused by the weak yen.
Why is the yen so low?
As simplified answer is because of the central bank interest rate differential between the Fed and the BOJ.
While the Fed raised rates throughout 2022 and have held higher for longer than expected so far throughout the last half of 2023 and so far in 2024, the BOJ raised rates only once, out of negative territory, in March this year.
At time of writing, the Fed interest rate is 5.50% and the BOJ interest rate is between 0% to 0.1%
Why can’t the BOJ just raise interest rates to match closer to the Fed interest rates?
If the BOJ does that, the government of Japan will not be able to pay back the interest owed to the central bank on the huge amount of money the BOJ has lent the J-government over the years in the form of bond purchases.
In essence, the Japanese government would go bankrupt.
How does Japan bring the yen up without going bankrupt?
One word – coordination.
The BOJ by itself can’t bring the yen back to a more traditional exchange rate range to the USD. The BOJ needs to synchronize its interest rate moves with what the Fed will do.
While the BOJ is raising rates, ideally the Fed is lowering rates, thus bringing the yen back upwards against the dollar and alleviating the inflation Japanese households have been feeling by lowering the yen denomination of imports.
