Prime Minister Sanae Takaichi has won a landslide victory in the early parliamentary elections in Japan. Are there now good reasons for a dialogue with the financial markets?
After the election in Japan, the markets are certainly holding still for the time being and the yen is appreciating slightly. Interest rates on long-term Japanese government bonds are still below the crash level on the day of the announcement of new elections and tax cuts in January.
Is this the calm before the storm or simply the calculation that (the drummer) Takaichi, after so many blows to the drum, no longer needs the loud sounds after the landslide victory and wants to push through her programme in dialogue with the markets?
In the 17th edition of his videocast, Prof. Dr Olaf Schlotmann analyses whether this calculation can work.
In any case, anyone who, like Takaichi, calls on the Japanese central bank to continue to pursue negative real interest rates single-handedly can hardly call for a stronger currency in the medium term. The weak yen dictates the necessary interest rate policy of the Japanese central bank, which alone took almost two years to raise the interest rate to 0.75% in the first place. Physics is familiar with the concept of communicating tubes; the economist Rudiger Dornbusch used the connections for his model to explain overshooting exchange rates.
It is worth noting in this context that the ECB recently pointed out in a completely different situation that a further appreciation of the euro against the US dollar could also trigger further interest rate cuts if the inflation rate in the eurozone continued to fall as a result of the appreciation.