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(Note) Month-end values until June 2024. (Source) U.S. Department of The Treasury Ministry of Finance, Japan
The Japan-U.S. interest rate gap (U.S. interest rates – Japanese interest rates) has been narrowing. This is due to changes in the monetary policies and economic conditions of both Japan and the United States.
Regarding Japan’s Interest Rate Hike
In a regular press conference on June 17, 2024, BOJ Governor Ueda indicated a policy to maintain the current monetary policy.
As of July 20, 2024, the Bank of Japan maintains a cautious stance on monetary policy. No concrete plans for an interest rate hike have been announced at this time.
Regarding the U.S. Interest Rate Cut
On the other hand, Federal Reserve Chairman Powell stated in his congressional testimony on July 9, 2024, that if the decline in the inflation rate continues, there might be a possibility of initiating a rate cut. He also expressed concerns that delaying a rate cut could negatively impact economic activity and employment.
Narrowing of the Japan-U.S. Interest Rate Gap
Graphs indicate that since October 2023, the interest rate gap for both 2-year and 10-year bonds has been narrowing. This movement is closely related to changes in the monetary policies of both countries.
Yen Depreciation in Exchange Rates
Despite the narrowing Japan-U.S. interest rate gap, the yen continues to depreciate in exchange rates. Stock prices and exchange rates have a nature of incorporating future expected values into current prices.
For example, if a future dollar appreciation and yen depreciation are anticipated, investors will buy dollars before the appreciation occurs and sell dollars once the appreciation happens. This leads to an immediate dollar appreciation as soon as the expectation arises.
While Japan is unable to raise interest rates promptly, the market may have previously anticipated that the strong U.S. economy would delay rate cuts. As a result, the outlook that the interest rate gap would not narrow further or might widen again could have influenced exchange rates.
If the narrowing of the interest rate gap continues, this outlook may be revised in the future.
Future Outlook
Next time, we will take a closer look at price trends, which are considered to have the most significant impact on interest rates.
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