Bank of Japan Meeting: Will the end of negative rates trigger volatility in global equity market?

Interesting times are ahead for Japan and the global markets. Global investors were keenly observing the outcome of the Bank of Japan’s meeting on monetary policy. BOJ policy may have an impact not only on the country’s future growth trajectory but also on the global market.

On Tuesday, March 19, the Bank of Japan raised its benchmark interest rate to 0 to 0.1%, for the first time in 17 years. The rate hasn’t changed from negative 0.1% since 2016. After the Bank of Japan has hiked the rate, it has ended the negative interest rates regime in the country.

Japan’s core consumer inflation rate was 2% in January and although Japan’s economy escaped a formal recession, worries about the slow pace of recovery remain. Compared to the first estimate of a 0.4% decrease, Japan’s revised gross domestic product (GDP) rose at an annualized rate of 0.4% in the October–December period from the previous quarter.

Japan’s population has been aging and shrinking, which has kept it off the global route for a while. In 2023, Japanese inflation reached a 41-year high, and the government has been pressuring companies to raise pay in response to rising living expenses.

Large companies are expected to propose significant wage increases during the labor-management wage talks on March 13. These increases would clear the path for the Bank of Japan (BOJ) to remove negative interest rates in either March or April.

Meanwhile, Japanese stocks are in a bull market. Japan’s benchmark stock market index has smashed the 40,000 mark for the first time, continuing its comeback after decades of stagnation.

Over the past year, as international investors have benefited from the low value of the yen and corporate governance measures that have increased shareholder returns, Japanese stocks have emerged as some of the best investments.

Here’s what Nigel Green, the CEO of deVere Group expects to happen in the global markets as a result of the major policy shift:

“Anticipate volatility in Japanese stocks as investors recalibrate their portfolios in response to the policy shift. Industries sensitive to interest rates, such as financials, could witness notable turbulence.

​Changes in Japan’s interest rate policy could also ripple through global bond markets, affecting the yields and prices of Japanese government bonds (JGBs) significantly. This can be expected to prompt investors worldwide to reassess their bond portfolios.”

​Adjustments in Japan’s monetary policy could trigger volatility in global equity markets.

​Sectors closely tied to Japan, such as automotive and consumer electronics, may experience stock price fluctuations influenced by currency movements and the performance of major Japanese corporations.

The performance of leading Japanese companies like Toyota, Honda, Sony, and Panasonic heavily influences investor sentiment toward these sectors.

Another notable impact is the potential reconsideration of global portfolios by Japanese investors if domestic assets become more appealing with higher interest rates.

This could lead to capital outflows from foreign markets, potentially affecting asset prices, especially in regions and sectors previously favoured by Japanese investors.”

The deVere CEO concludes: “If Japan ends the world’s last negative interest rates this week, the impact goes well beyond the country’s borders and investors should be agile.”