Why is it said that Japan's interest rate hike this time is a failure?

The Bank of Japan has raised interest rates to the highest level in 30 years, and what has happened? The yen not only did not rise but instead fell to a historical low. This is completely contrary to the effect they originally wanted.

First, let's look at what is happening now. The yen has been falling too quickly recently, and the Japanese officials have already started to make statements. If the exchange rate fluctuates too violently, the government is prepared to take appropriate action. In plain language, it does not rule out intervening in the exchange rate personally.

Currently, the USD/JPY is around 157, and the market generally believes that once it approaches 160, Japan may, like last year, directly intervene to save the yen.

Hasn't there already been an interest rate hike? Why has the yen become weaker instead?

There are roughly three reasons for this. First, the positive effects of the interest rate hike have long been absorbed by the market. Second, Japan's interest rates appear high, but they are still “negative.” Currently, Japan's nominal interest rate is 0.75%, but inflation is close to 3%, which means the real interest rate is still over -2%. And what about the United States? The real interest rate is positive. What does this mean? The interest rate differential still exists, so arbitrage trades of borrowing yen and buying dollars naturally continue to occur.

Third, summarizing the governor's statements at the press conference: there is no roadmap for future interest rate hikes, and there is no rush. He even said that the highest interest rate in 30 years has no special significance. The market understands that the Bank of Japan is not in a hurry to continue tightening. As a result, the yen has been sold off even more severely. But this is not the most fatal issue. The visibly apparent problem is that Japan is now trapped by debt.

Government debt is 240% of GDP, and if long-term interest rates really go up, Japan may not be able to bear it directly. So they have two options: either the debt has problems, or let the currency continue to depreciate.

It seems that they have chosen the latter.

So what does their choice mean for the global market? In the short term, with the yen not rising and arbitrage not being closed, U.S. stocks, Japanese stocks, cryptocurrencies, and gold have instead breathed a sigh of relief. The Nikkei Index rises, and gold and silver hit new highs.

However, if Japan suddenly intervenes or is forced to accelerate interest rate hikes, the reversal of arbitrage trading will have a significant impact. In 2024, it has already been demonstrated once: Japanese stocks plummeted, and Bitcoin followed suit.

Japan is currently walking a tightrope between currency depreciation and a debt crisis.