I’m no good at economics lol
In: 4812
It’s not causing panic. The Japanese stock exchange nikkei fell today because it’s valued in yen, and yen went up today big time. Why did it go up? Because, as expected, Japan was the last country to increase its central bank rate, effectively reducing future yen supply, which in turn increases its value.
Tldr yen goes up = market goes down
this happens to balance out the value of the companies as the currency value goes up.
From my understanding.
Japan has been going through a multi decade period of deflation.
Usually, deflation = lower rates
Usually, inflation = higher rates
Inflation in Japan is rare so its a sign that global inflation might not have peaked.
Good Lord, the answers in here range from close to awful. I’ll try and condense one.
The impact itself is that if an investment has a rate of return less than 0.5%, then everyone holding it would be better off selling it and putting their money in bank bonds.
This removes cash from the economy, which curbs inflation, but it also removes cash from the economy, which curbs growth.
There’s then a trickle effect. The investments below 0.5% annual yield are companies. To prevent being worthless, since leaving cash in the bank is more profitable than being invested in the company, they have to increase yields to above 0.5%. This typically results in layoffs to reduce costs. Let’s say that company gets to 1% returns.
Well, now any company that was running at 0.75% is going to do the same. Up the chain.
Meanwhile, private banks exist by both investing and loaning out money. If the investments are more expensive to purchase, they’ll raise interest rates on consumer and business loans. On top of that, the reduced cash in the economy as mentioned earlier comes back to haunt us. New businesses are less likely to spring up with higher interest rates on loans and less cash in consumer’s pockets to buy what the business offers.
Higher interest rates pinch the economy. Now there’s another side to this.
Inflation and recession are coming regardless of this move. What it allows the national bank to do when it gets to a breaking point is DROP the interest rates through the floor, spurning massive investment and cashflow in the economy immediately after. It’s a tool to allow for resolving catastrophe.
But knowing that, market investors recognize that the bank gearing up to fix impending economic collapse means the market isn’t safe, so they’ll start pulling cash as fast as possible to insulate. And the markets tank.
There’s turmoil in the Asian markets? Quick, someone get me Tracy Jordan!
I see quite a few good answers here, which is refreshing, but you might also ask this on /r/askeconomics for more feedback!
They’re not increasing the rate, they’re just allowing market forces to influence the 10Y rate more than they currently are. They currently intervene in the market when the yield on the 10Y gets above 0.25%; they’re rasinging the threshold which they intervene from 0.25% to 0.50%.
> I’m no good at economics lol
Truth is, nobody actually is; in fact, it might actually be impossible to actually be good at it. You are likely almost as good at it as the people who run reserve banks, but just because there is very little actual skill involved and the economy is way too complicated to think anybody understands it.
There was a great explanation of this recently by Veritassium’s channel on youtube about becoming an expert. The common thought it it takes 10,000 hours of experience…. but that is experience in a consistent environment with consistent feedback. Markets don’t do that and tend to act randomly. Random events are never consistent feedback…. so its literally an area that is impossible for expertise to exist.
He wants an ELI5 people, quit it with the complex stuff.
The Bank of Japan has been printing money at full speed for 30 years now. Increasing their interest rate from .25 to .5 means they’re slowing down the (digital) money printers.
Economies like stability, and this means they’re massively changing course.
It just means that inflation is too rapid for even a country like Japan, one that is desperate for inflation. Think of it like this, farmers want rain during a drought to help feed their crops, but they don’t want a tsunami. Right now, Japan is saying they are seeing a “tsunami” of inflation that might cause their citizens to go bankrupt just to buy the typical goods and services.
I also want to add that the “rapid inflation”narrative that Japan is indicating runs counter to the U.S Feds guidance that inflation is slowing. Thus, the markets are reacting to this conflicting information.
Check the economics explained episode on Japan. He explains it very well.
Japan is out of the norm of most countries.
Interestingly enough i believe he explained that there are 4 types of economies in the world.
Developed, underdeveloped, Japan and Argentina (them both being outside the norm for various other reasons) his channel is awesome by the way
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