Stronger yen brings more capital inflows into M’sia: Experts

PETALING JAYA: A stronger Japanese Yen means stronger capital inflows into Malaysia via increased foreign direct investment (FDI) – following the Bank of Japan’s (BOJ) decision to raise the overnight call rate – according to Emir Research Jason Loh Seong Wei.

Loh told Sunbiz however said the potential increase in capital inflows into Malaysia depends on the extent of the yen’s appreciation.

“A stronger JPY indicates stronger purchasing power for Japanese consumers and businesses with implications on imports, including from Malaysia as a top trading partner,” he added.

Loh also said that the increase in the overnight call rate by the BOJ isn’t expected to negatively impact the RM.

He said the ringgit is likely to maintain a slight positive performance compared to the Japanese Yen (JPY).

“The RM’s correlation with the JPY isn’t as strong as compared with the RMN/CNY. However, the RM tends to appreciate against JPY when the latter strengthens against the greenback.

“This is due to market sentiments regarding the close trading and investment links between the two countries and, by extension and inclusion, also in relation to China,” he said.

Meanwhile, Loh said Yen is not anticipated to experience a substantial increase in value against the US dollar (USD) at the current juncture as investors are adopting a “wait and see” approach.

Loh highlighted whether this rate increase is a one-time adjustment or part of a broader strategy to return monetary policy to more conventional levels.

“The question is: will the overnight call rate continue to rise, for instance, to 2%,” he said.

The BOJ has decided to raise overnight call rate from -0.1% to between 0% and 0.1% for the first time in 17 years as well as ending 8 years of being in the negative rate territory as well as other remnants of its unorthodox policy which for some represents the beginnings of policy normalisation.

Loh said that there’s plenty of room for monetary policy to increase the interest rate, considering that the “natural rate” of interest, which balances investments and savings in the long run, should now be higher due to factors like the narrowing output gap, among others.

“The BOJ would need to balance increased wages and the resulting higher savings, leading to current spending and inflationary pressures, with the imperative to maintain ultra-low interest rates to support future consumption capacity.

“The ultra-low interest rate policy which includes the zero-interest rate policy/ZIRP (not necessarily the same as negative interest rates) is, therefore, critical for the sake of Japan’s monetary and fiscal policy,” Loh said.

Meanwhile, Bank Muamalat Chief Economist Mohd Afzanizam Abdul Rashid believes that the impact of the BOJ interest rate hike on Malaysia is expected to be minimal.

He told Sunbiz that this assessment is based on several factors, including the relatively low share of Japanese Yen in global trade settlements (only 5%) and the dominance of the US Dollar in international transactions.

Similarly, Afzanizam said the BOJ decision for future rates are still highly uncertain as they may not aggressively raise their rates.

“At the current juncture, the BOJ may not subscribe to an aggressive monetary tightening. Japan’s inflation rate is already on downward trajectory to 2.8% in February 2024 from as high as 4.3% in January 2023.

“Its quite possible BOJ might increase the rate to bring the inflation rate towards the 2% target but I suspect its going to be gradual. Structurally, they might need low interest rate regime to promote growth,” he said.

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