jen & japan 10Y yield
7-Dec-2023. Japan. Today, a lot is happening in Japan after the statements of Kazuo Ueda, the governor of the Bank of Japan, leaving no illusions about the increasingly fast approaching normalization of monetary policy. Inflation of 2.9% and expected salary increases in 2024 are the main reasons for policy tightening, which will have significant consequences for global financial markets. The next BoJ meeting is on December 19, when we will probably learn more about the future normalization, but the hikes will probably take place only in 2024. Yen strengthens today by 2.6%, and 10-year bond yields increase by 13 bps to 0.757%. Figure 1 shows the yields of 10-year Japanese and US bonds, and how much the Yen has weakened over the last two years compared to other currencies in the DXY basket (bottom panel).
jen has weakened a lot today
11-Dec-2023. The Japanese Yen is weakening significantly today. Today's decline in the yen accelerated significantly when information appeared (on Bloomberg) that the BoJ sees no need to end negative rates in December. A few days ago, I wrote that the level of inflation in Japan should not significantly affect monetary policy: “Comparing inflation to other countries, it is difficult to say that Japan has a problem with inflation. Additionally, the data for November looks encouraging. Hence the conclusion that unless inflation increases significantly, it should not significantly affect the monetary policy of the BoJ.”
BoJ Mar-24 meeting preview
17-Mar-2024. BoJ intends to raise interest rate by 10 bps (or a little more) On Tuesday we will find out whether the Bank of Japan raised the interest rate or whether it will do so only in April. The market is pricing a near 50/50 chance of the central bank maintaining its rate at the current level of -0.10% or if it hikes by 10bps to 0%. It is possible that the increase will be higher than 10 bps and we will land somewhere in the range of 0-0.1%. While the end of the negative interest rate policy is of great importance in the media (Figure 1), it is not necessarily critical for the markets. The main argument for the decision to increase rates, which has been communicated for a long time, is not so much high inflation, but the amount of wage increases negotiated by trade unions in 2024. This year, the RENGO (Japan's largest trade union) announced on March 15 that in the 1st tally it secured the wage increase of 5.28% (exp. 4.1%; 2023 final figure 3.6%). This is the highest wage increase since 1991, and instead of strengthening, the yen even weakened quite a bit (15-Mar-2024: USDJPY +0.54% to 149.067). Will higher wage growth drive consumer spending? In January this year Japanese All Household Spending turned out to be very weak: -2.1% M/M vs. Exp. 0.4% (Prev. -0.9%) and -6.3% Y/Y vs. Exp. -4.3% (Prev. -2.5%). The RENGO second tally is going to be announced on March 22nd, the third one on April 4th and the final one in July. After the bubble burst in 1989, the BoJ tried to raise interest rates once in 2006 (Figure 2). It was only two hikes. Will it be more than one/two this time? Figure 3 and 4 show the change in the yield of government bonds compared to the BoJ policy rate.
BoJ Mar-24 meeting review
19-Mar-2024. Japanese liftoff Bank of Japan decided today: 1) Raise policy rate to 0.1%: exactly the Bank will encourage the uncollateralized overnight call rate to remain at around 0 to 0.1 percent, i.e. Bank will apply 0.1% rate to current account balances held by financial institutions at the Bank (excluding required reserve balances), 2) The Bank will continue its Japanese government bonds purchases with broadly the same amount as before (about Yen 6 trillion monthly - $40 billion), 3) The Bank will discontinue purchases of ETFs and J-REITs (Japan real estate investment trust), 4) The Bank will gradually reduce the amount of purchases of CP and corporate bonds and will discontinue purchase in about one year. Figure 1 graphically shows today's BoJ decisions (source: BoJ) And key takeaways from BoJ statement: 1) As the virtuous cycle between wages and prices has become more solid, the price stability target (2%) will be achieved in a sustainable and stable manner toward the end of the projection period (fiscal 2025, i.e April 2025 – March 2026), 2) Japan’s economy is projected to continue growing at a pace above its potential growth rate, 3) Key risks to the outlook: a slowdown in the pace of recovery in overseas economies; commodity prices; and domestic firms’ wage- and the price-setting behavior. Market reaction (Figure 2): USDJPY +0,87% Nikkei 225 +0,66%
