JPN Macro
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 Jan-24 meeting review
23-Jan-2024. The Bank of Japan held its meeting today and, as expected, it left interest rates unchanged. This was a pretext for a slight strengthening of the yen and a simultaneous decline in the Nikkei225 immediately after the announcement. Below are the latest BoJ forecasts (the medians of the Policy Board members' forecasts): - Core CPI 2024 (all item less fresh food and energy): 1,9% (forecast made in Oct-2023: 1,9%) - CPI less fresh food 2024: 2,4% (forecast made in Oct-2023: 2,8%) - GDP 2024: 1,2% (forecast made in Oct-2023: 1,0%). ----- - Core CPI 2025 (all item less fresh food and energy): 1,9% (forecast made in Oct-2023: 1,9%) - CPI less fresh food 2025: 1,8% (forecast made in Oct-2023: 1,7%) - GDP 2025: 1,0% (forecast made in Oct-2023: 1,0%). So a little bit of lower inflation with higher GDP growth in 2024. Sounds perfect. Below is an excerpt from the just-published Outlook for Economic Activity and Prices on future conduct of monetary policy: “(…) the Bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions. (…) The Bank will continue with QQE with Yield Curve Control, aiming to achieve the price stability target, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner”. China is reportedly seeking to "mobilize" $278 billion of funds to support a fund aimed at stabilizing stock prices. The funds are to come mainly from the offshore accounts of Chinese state-owned enterprises. The market is not entirely convinced and the Hang Seng index only rebounds by about 2.6%. It had previously fallen 12.2% this year. At the other end, we have Japanese shares which are already 9.1% up this year. See Figure 1.
Japanese Stocks vs USDJPN
9-Feb-2024. Japanese stocks love loose monetary policy (forever) Subjective market review (9-Feb-2024). In Japan, are we facing a cycle of Western-style interest rate hikes? Not necessarily...maybe just one hike and done. This scenario would be ideal for Japanese shares. The Nikkei 225 is already +10.3% this year (vs. S&P500 +4.8%. Nasdaq100 +5.7%, EuroStoxx50 +4.0%, WIG30 -0.97%). And since January 2023, Nikkei has increased by as much as +43.48% - see Figure 1. Why can't we count on a series of Western-style rate hikes in Japan? Because the central bank itself says so..., or more precisely, Deputy Governor Ucheda Shinichi, February 8, 2024, Speech at a Meeting with Local Leaders in Nara: “(…) even if the Bank were to terminate the negative interest rate policy, it is hard to imagine a path in which it would then keep raising the interest rate rapidly. The Bank would, I think, maintain accommodative financial conditions even if the termination were to take place. (…) the Bank does not project that inflation will significantly exceed 2 percent. (…) the current situation is that Japan's real interest rates have been substantially negative and financial conditions have been highly accommodative. This situation is not expected to change much.” Additionally, Ucheda pointed out two things that rule out rate increases in like Western countries: (i) in Western countries (USA, Euro Area) inflation has jumped to levels above 8%, and the current situation with inflation in Japan is completely different, and ( ii) inflation expectations in the West are anchored around 2%, while in Japan they are just heading there... therefore a loose monetary policy is still needed to allow inflation expectations to continue to rise, not to mention the risk that they may start to fall again. Ucheda Shinichi: “(…) in both the United States and the euro area, inflation was above 8 percent when central banks began raising their policy interest rates in 2022, which gave rise to a significant risk of undermining people's confidence that inflation would be at around 2 percent over the medium to long term. The current inflation situation in Japan is markedly different. Another difference with Europe and the United States, where medium-to long-term inflation expectations have been anchored at 2 percent, is that those expectations in Japan are still in the process of climbing toward 2 percent. This means that an accommodative monetary policy is needed to lift inflation expectations further and to be mindful of the risk that they would fall again.” Such statements were enough for the Yen to weaken against the dollar by 0.8% on February 8 (USDJPY +0.83%) and the Nikkei to surge by 2.1%. However, the rates of return on the Nikkei 225 expressed in other currencies will be lower if the yen weakens - see Figure 2. However, this is not a problem for investors - on the financial markets you can easily hedge the currency risk yourself or simply buy an outright ETF for Japanese shares with hedging already being built in, e.g. iShares MSCI Japan EUR Hedged UCITS ETF.
Q4-2023 GDP & Consumption
15-Feb-2024. Tonight we also got the GDP data in Japan for Q4 2023. The market expected +1.1% and received -0.4% - see Figure 2. Are two negative quarters in a row a common definition of recession? I have already written many times that based on inflation data in the cherry blossom Japan, the BoJ cannot raise interest rates in the Western style, and it is possible that it will only raise it once and be done. After the publication of GDP data, it may turn out that even one increase may be problematic. Additionally, real households consumption is decreasing for the third quarter in a row (Figure 3), as households income does not keep up with the increase in inflation.
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%
Nikkei 225 +21,8% in 2024
27-Mar-2024. Nikkei 225 +21.8% in 2024! But in yen How are individual stock markets performing this year? Figure 1 shows year-to-date returns for selected indices in local currency. All three main indexes of the Hong Kong Stock Exchange are in the red. The best performers are European (+12.2%) and Japanese (+21.8%) stocks. The situation changes slightly when we compare the rates of return in the US dollar (without hedging) - Figure 2. Nikkei is only +13%, and the difference between American and European shares is small. For an investor from the euro zone, the rates of return expressed in euro are shown in Figure 3. An investor from the euro zone did best this year if he bought American shares and did not hedge the currency, and when he bought Japanese shares and hedged the currency! Bonus chart – Figure 4 shows the Nikkei 225 index returns in various currencies since the beginning of 2022.
BoJ March 2024 SOO
29-Mar-2024. Bank of Japan SOO Summary of Opinions at the Monetary Policy Meeting (SOO) is a good and concise summary of the opinions of policy board members. Generally, policy board members have high hopes that: 1) higher inflation, 2) higher corporate profits, 3) higher salary increases and 4) higher prices of Japanese shares ... may prove to be a turning point for the Japanese economy: “Expectations for the outlook for Japan's economy have increased, since the wage growth agreed in this year's annual spring labor-management wage negotiations to date has been higher than expected and stock prices have recently exceeded the record high. Thus, the economy is possibly reaching a historic inflection point.” Economic growth is to be driven by "a virtuous cycle from income to spending". This will also allow BoJ to achieve the 2% inflation target: “As recent data and anecdotal information from firms have gradually been shown that the virtuous cycle between wages and prices has become more solid, it can be judged that it is now within sight that the price stability target of 2 percent will be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 Outlook Report". But the BoJ is not yet entirely sure that the virtuous cycle is solid: " (…) in order to confirm whether the virtuous cycle between wages and prices has become more solid, the Bank needs to carefully assess the rise in services prices and the progress in the pass-through of cost increases to selling prices by small and medium-sized firms " Achieving the 2% inflation target allows for significant changes in monetary policy (end of negative policy rate, end of yield curve control), but monetary policy should remain accommodative: “It is important to clearly communicate through the use of various methods that the changes in the monetary policy framework proposed at this MPM will not be a regime shift toward monetary tightening, but rather a part of efforts to achieve the price stability target.” “The Bank will continue its JGB purchases at broadly the same amount as at present” “JGB purchases will be conducted from the perspective of avoiding rapid fluctuations in long-term interest rates, not as an active monetary policy tool. In doing so, it is important to recovery promote in market liquidity while letting interest rates be determined by the market as much as possible.”
Carry Trade Unwind
13-Aug-2024. Be careful what you wish for… In Japan, the life after the carry trade unwind seems to be slowly returning to normal... Figure 1. Today is another day of the yen weakening against the dollar. Interestingly, the BoJ was probably not entirely satisfied with what it really wanted to achieve, i.e. strengthening the yen, also at the expense of investors trying to weaken it further. See Figure 2, where I marked probable interventions by the BoJ trying to strengthen the yen, then it succeeded, but probably to a greater extent than expected... hence Shinichi Uchida's statement (August 7) that "BoJ won't hike interest rates when markets are unstable." But what may be one of the main root causes for the strong yen... are upcoming rate cuts in the US. In 2022, the yen began to weaken sharply 12 days before the Fed's first rate hike - see Figure 3.
