When Japan ends negative interest rates

Japan implemented negative interest rates in January 2016, surprising global markets with an unconventional monetary policy to combat deflation and stimulate economic growth.

The policy, implemented after other monetary moves failed to have the desired effects, has sought to encourage banks to lend, consumers to spend and businesses to invest by penalizing holding excessive reserves.

Eight years later, this monetary experiment could be coming to an end – as soon as this month. Reuters has reported that a “growing number” of Bank of Japan policymakers are leaning in that direction amid expectations of hefty pay hikes in this year’s annual wage negotiations.

If Reuters and others predicting a policy shift have it right, then what can be expected after negative rates are made positive?

Such a shift is likely to lead initially to a stronger yen, a reflection in part of growing optimism in the domestic economy. However, sustained yen strength would also pose serious challenges for Japanese exporters who have benefitted from a recent weakening of the currency.

Japanese stocks can be expected to experience volatility as investors adjust their portfolios in response to the policy change. Industries sensitive to interest rates, such as financials, can be expected to see significant movements.

Japanese government bonds (JGBs) are a significant component of global bond markets. Any shift in Japan’s interest rate policy will cause investors to reassess their portfolio positions, affecting bond markets globally.

Global equity markets could also see volatility. Sectors with significant exposure to Japan, including automotive and consumer electronics, can be expected to see price fluctuations based on currency movements and the