Monetary policy in Japan and the United States is expected to center on trends in asset prices. The relationship in which share prices in both countries influence financial conditions has been reaffirmed, and future developments are likely to be driven by share prices.
At the press conference following the Bank of Japan's monetary policy meeting on 18 September, the BOJ explained that it assesses financial conditions through three elements: interest rates, bank lending and asset markets. Long-term interest rates have already risen, and the next focus could be the trend in bank lending. It has become difficult to assess the economy based on rising interest rates alone, and the view is emerging that developments in asset markets influence financial conditions.
In addition to the textbook transmission channel, two possible channels are said to be emerging: rising interest rates could restrain lending through economic deterioration, while lending could increase to avoid an economic downturn. Some have pointed out that bank lending is currently becoming more active against a backdrop of rising interest rates and expanding earnings, making it important to identify the factors behind lending trends.
In the United States, share prices are also said to be supporting personal consumption through the wealth effect, with a relationship identified between rising long-term interest rates and sustained consumption. If share prices fall, the wealth effect will shrink, increasing the likelihood that the adverse effects of high interest rates will become apparent.
The central banks are entering an era in which they follow the markets. The market should serve as a mirror of the future economy, but share prices themselves now influence consumption and investment, creating a situation in which they also affect policy decisions.