International | Oct 20 2006
By Chris Shaw
Despite the official end of the zero interest rate policy (ZIRP) in Japan earlier this year, Macquarie Bank estimates rates are effectively lower now than before the Bank of Japan (BoJ) lifted rates a few months ago.
The analysts suggest monetary conditions have eased enough in recent months to equate to a 0.5% cut in interest rates, more than offsetting the 0.25% increase by the BoJ. Partly this has been the result of a weaker exchange rate, which is now at 20-year lows in real terms.
This combination of a weak currency and low interest rates at a time when the economy is recovering doesn’t sit well with the BoJ, Macquarie noting the bank’s comments seem to indicate a normalising of interest rates remains its preferred option.
This would suggest further increases in rates in coming months, Macquarie forecasting one further increase this year before four more such increases over the course of 2007. The analysts are somewhat sceptical of BoJ comments that any further interest rate move will be data dependant, suggesting instead their meaning is it would take some surprise in the data to delay the process of normalising rates.
As a result, they suggest investors watch the yen/US dollar exchange rate, as that is likely to give clues in terms of the timing of future increases in interest rates as continued weakness in the yen may speed up the process, while yen strength may slow it down. Regardless, Macquarie suggests a normalisation of rates in Japan is a case of when, not if.
