For years, US investors have been able to largely ignore Japan and its monetary policymakers. Those days are over.
At issue is laying the groundwork for Japanese policymakers to abandon their longstanding policy of keeping official interest rates and Japanese government bond yields below or near zero as inflation continues to rise. It is possible that Market watchers say savings-obsessed Japanese investors may start selling offshore assets as domestic investments look more attractive.
“The depth of the savings culture in Japan means that when interest rates (in Japan) are negative and bond yields are near zero, capital barriers from Japan to Europe and the US become one of the main forces in the market. ” said Hugh Roberts. The head of analytics at research firm Quant Insight told his MarketWatch in a phone interview.
The Bank of Japan rocked global financial markets last December when it effectively eased the long-standing cap on 10-year government bond yields as part of a policy known as yield curve control. Under yield curve control, the Bank of Japan will set the short-term interest rate at minus 0.1% while aiming to maintain the interest rate on the 10-year government bond TMBMKJP-10Y.
Almost 0%.
The Bank of Japan said last month that yields on 10-year Japanese government bonds could rise to 0.5% from the previous cap of 0.25%.
The unexpected move was seen as potentially signaling a path to broader monetary tightening by the last major world central bank to maintain ultra-accommodative policies, but outgoing Bank of Japan’s Haruhiko Kuroda The governor denied it was a precursor to tightening policy.
Global investors were worried that the Bank of Japan could finally abandon its role as the last remaining low-rate anchor among the world’s major central banks.
YenUSDJPY,
The yield on 10-year Japanese government bonds traded above 0.4%, reaching its highest level since 2015, while surging after the Bank of Japan’s Dec. 20 decision, rising more than 3% against the U.S. dollar. ,
It surged as global bond yields rose. The US dollar fell broadly against other major currencies. But US stocks shrugged off the early losses.
The major U.S. stock indices on Tuesday were the Dow Jones Industrial Average, DJIA,
S&P 500 SPX,
It was flat.
Speculation about what the BOJ will do on Wednesday runs the gamut. Some observers believe central banks may abandon yield curve control (YCC) altogether. Some argue that the traditionally conservative and cautious BOJ is unlikely to move quickly, especially after he stirred up market volatility in December.
Yields on 10-year government bonds temporarily rose to 0.545% in Asia on Friday. To stem the rise, the BOJ bought 1.8 trillion yen worth of government bonds with maturities between 1 and 25 years after buying 4.6 trillion yen on Thursday.
Analysts say the market reaction to the BOJ’s move in December likely surprised policymakers. Far from calming the market, the move appeared to lure traders to test the BOJ’s resolve.
The BOJ’s plan is almost certainly to make a one-off change to ease pressure on YCC policy and buy time to calm down and hand over Kuroda when he resigns in the spring, and is due mid-2023. No further policy changes are planned until then, Krishna said. Notes from Tuesday by Guha and Peter Williams of Evercore ISI. The question is whether the original plan can be maintained in the light of the “intense dynamics” unleashed by the December policy change.
Risks are high, they write, because “if YCC policy is to be further relaxed, or even abandoned altogether, a rise in government bond yields will trigger a global shock that will drive Japanese equities down.”
That said, the shock to global yields is likely to be manageable, say ISI strategists. Like others, they pointed out that rising currency hedging costs from last year’s surge in the dollar meant Japanese investors were no longer the most important buyers of U.S. Treasuries at this point in the cycle.
But QI’s Roberts argued that investors need to be aware of the implications of moves beyond such short-term cyclical factors. The BOJ’s move away from ultra-accommodative policies will eventually become a structural force that pulls Japanese demand out of the market.
The biggest impact is expected to be in currency markets.
The US dollar fell 3.2% last week and the yen traded to its lowest level since May 30 against the Japanese yen on Friday. The dollar fell 0.1% on Tuesday, dropping more than 14% for the first time since it topped the ¥150 level in October. 1990.
The FX options market shows that traders expect a big move up and down for the dollar/yen after Wednesday’s meeting.
The dollar/yen pair’s one-week implied volatility hit 23%, its highest since March 20, Chris Weston, head of research at Australia-based brokerage Pepperstone, said in a note. pointing out.Currency pairs up and down 3% this week
look: Japanese yen is ‘the hottest story in town’ as the US dollar stumbles
The potential for huge moves raises concerns that something could break somewhere in the global financial markets.
Lauren Goodwin, an economist and portfolio strategist at New York Life Investments, sees eerie parallels between Japan and the bond market crisis that hit Britain last year. A sudden spike in yields on UK government bonds, known as gilts, has pushed many pension funds that rely on derivatives-based strategies to the brink of bankruptcy, but the Bank of England has intervened in an emergency bond-buying programme. Later, disaster was averted.
“For years, Japanese insurers have used derivatives to hedge interest rate risk as low interest rates have challenged repaying future debt,” she said in a note Monday. rice field.
“Japan’s declining population has increased the need for future payments, which may increase the use of riskier yield strategies and further increase market vulnerability,” she observes. noted that its bond market is five times the size of the UK gold market.
Beyond such danger, some kind of policy shift seems inevitable.
QI’s Roberts said, “Depending on how this policy rollback goes, whether it’s going to be a slow burn or a big bang event, the end game will be the same: less funding from Japan. “I think that’s a really big deal.”
