summary: The market has been predicting that the Bank of Japan's monetary policy change node should be in April next year, because then Governor Haruhiko Kuroda will step down. Now the Bank of Japan has announced a new decision earlier than market expectations, which naturally surprised the market. Previously, more than 40 economists had predicted that the Bank of Japan would not change its monetary policy this time.
China Times (www.chinatimes.net.cn) reporter Ye Qing reported from Beijing
As Christmas approaches, an announcement from the Bank of Japan triggered market turmoil. As the last central bank to hold an interest rate meeting this year, on December 20, the Bank of Japan announced adjustments to its yield curve control policy and raised the target upper limit of the 10-year government bond yield from 0.25% to about 0.5%.
This decision caused the yen to strengthen, and the U.S. dollar plummeted 400 points against the yen, falling from 137 points to the 133 mark. As of 17:33, the US dollar against the yen was last at 132.049, a decrease of 3.52%, a new low since August.
Japan's 10-year government bond prices plummeted, yields soared. At noon on the 20th, Beijing time, according to media reports, the Osaka Exchange announced that Japanese government bond futures trading was suspended. It is reported that Japan’s 10-year government bond yield surged 20.5 basis points to 0.455%, the highest level since 2015.
Will the unexpected move by the Bank of Japan accelerate the return of capital to Japan and trigger a sell-off in global assets?
Operations that shocked the world
The Bank of Japan unexpectedly announced when announcing its interest rate decision on Tuesday that it would allow Japan's 10-year government bond yield to rise to around 0.5%, which is higher than the previous upper limit of the fluctuation range of 0.25%. This expansion of the yield curve control zone was something that almost no market participants had expected before.
At the same time, the Bank of Japan decided to continue to maintain short-term interest rates at minus 0.1% and keep long-term interest rates around zero by purchasing long-term government bonds.
In addition, the Bank of Japan also announced an unplanned bond purchase operation on December 20, which will purchase 100 billion yen of 1-3-year Japanese government bonds, 100 billion yen of 3-5-year Japanese government bonds, 300 billion yen of 5-10-year Japanese government bonds, and 100 billion yen of 10-25-year Japanese government bonds. The Bank of Japan also announced that it will increase its purchase of Japanese government bonds to 9 trillion yen per month from January to March next year.
In terms of asset purchases, the Bank of Japan will purchase ETFs and Japanese Real Estate Investment Trusts (J-REITs) as needed, with the annual incremental caps on their outstanding amounts being approximately 12 trillion yen and 180 billion yen respectively. The Bank of Japan will also purchase commercial paper and corporate bonds at the same rate as before the epidemic, so that its outstanding amount will gradually return to pre-epidemic levels, which is about 2 trillion yen for commercial paper and about 3 trillion yen for corporate bonds.
Regarding today's market performance of Japan's 10-year government bonds, Xu Yaxin, president of Jiangxin College, said in an interview with a reporter from " China Times ": "The surge in Japan's 10-year government bond yields is mainly because the Bank of Japan directly raised the upper limit target, raising the 0.25% level by 25 basis points to 0.50%. Although the Bank of Japan still maintains the basis The quasi-interest rate remains unchanged at a historical low of -0.10%, but the Bank of Japan's increase in the target upper limit of the 10-year government bond yield is still beyond the market's expectations. "
Huang Jinwen, former director of strategic planning at the Chicago Mercantile Exchange, told reporters that the market believed that the Bank of Japan sent a major signal of policy adjustment, causing the 10-year government bond yield to rise sharply from 0.251% to 0.377%. Because the Japanese yen plays an important role in the foreign exchange market , it is a commonly used financing currency in foreign exchange arbitrage transactions. The increase in the cost of Japanese yen borrowing will have a significant impact on the active USD/JPY and AUD/JPY arbitrage trades in the foreign exchange market.
Huang Jinwen said that due to the continuous interest rate hikes by the United States, the United Kingdom and the European Central Bank this year, if Japan continues to implement monetary easing policies, it will exert continuous depreciation pressure on the yen; in October this year, the yen hit a 40-year low against the US dollar of 150:1; the Bank of Japan has recently boosted the trend of the yen through large-scale purchases of government bonds. Today's decision by the Bank of Japan, I personally think is a response to the Federal Reserve last week's 50 basis point interest rate hike.
Rodrigo Catril, a strategist at Standard Chartered in Sydney , also said that expanding the range of government bond yields is seen as a move to improve market function, but traders in the foreign exchange market believe that the Bank of Japan now prefers a stronger yen (or at least does not want the yen to weaken further). On the surface, the statement on YCC (yield curve control policy) reinforces the view that the Bank of Japan’s willingness to wait for the right kind of inflation is indeed limited.
In addition, some industry insiders said that the market had been predicting that the Bank of Japan's monetary policy change point should be in April next year, because Bank of Japan Governor Haruhiko Kuroda will step down in April next year. However, surprisingly, the Bank of Japan announced a new decision earlier than market expectations, which naturally surprised the market. More than 40 economists had previously expected that the Bank of Japan would not change monetary policy this time.
GAMA Asset Management said that as the Bank of Japan becomes less dovish, the dollar against the yen may fall below the 125 mark. From the perspective of fundamentals , the Japanese yen is still very cheap and needs a catalyst to start the appreciation market. The Federal Reserve has signaled a softening of its hawkish stance, while the Bank of Japan is beginning the process of normalizing interest rates after years of negative interest rates. The rise in government bond yields will attract the Japanese people's capital to return to Japan, so global assets are expected to face some adverse factors. The Bank of Japan's move has strengthened the weakening trend of the US dollar.
Will it trigger a wave of asset selling?
Bank of Japan Governor Haruhiko Kuroda’s 10-year term is coming to an end. He is known for making moves that surprise the market, although his moves have tapered off in recent years. Market participants had expected that the Bank of Japan's time to maintain low interest rate policies might be running out, but they had generally believed that Kuroda would not take action at the last policy meeting of the year.
The Bank of Japan did not mention inflation in its statement on Tuesday as one of the reasons for allowing government bond yields to rise as high as 0.5%. Instead, it points to a deterioration in the functioning of the government bond market and the divergence between 10-year government bond yields and other maturities. The Bank of Japan said Tuesday's move would "facilitate the transmission of the effects of monetary easing," suggesting it did not want the decision to be interpreted as monetary tightening.
However, foreign exchange trader Li Xin told a reporter from the China Times that this time the Bank of Japan’s monetary policy adjustment seems mild, but it is of great significance to a central bank that has long held a dovish stance. This means that as the policy differences between the Federal Reserve and the Bank of Japan narrow slightly, the next option the Bank of Japan may consider may be to cancel the YCC policy or even exit the negative interest rate policy.
In addition, Li Xin said that it is worth noting that the unexpected turn of the Bank of Japan may have a significant impact on the global market, which will set off a wave of cross-asset financing transactions around the world, and bond yields will rise. Japanese investors are one of the largest owners of foreign financial assets. Japan is about to face the impetus for funds to flow back into Japan, and there may be further capital outflows in the U.S. bond market. As the global financial situation tightens, the cash flow discount rate is likely to increase in the future.
Xu Yaxin said that since the term of the current Bank of Japan Governor Haruhiko Kuroda will end on April 8, 2023, choosing to take such action at such a time point means that the Bank of Japan has become very obviously vigilant about the continued depreciation of the yen exchange rate this year, which may trigger a revaluation of bond market yields and even stimulate an increase in yields in developed countries in Europe and the United States.
"For the foreign exchange market, due to the long-term practice of negative interest rates by the Bank of Japan, the Japanese yen has usually become the first choice for carry trades. This move by the Bank of Japan will increase the financing cost of the Japanese yen, that is, allow the Japanese yen to flow back. It is obvious that the chain reaction will be the appreciation of the Japanese yen short-term , and the return of funds in European and American stock markets, which will intensify the recent adjustment trend of European and American stock markets, and will also trigger a new round of selling of global assets." Xu Yaxin said.
currently has huge spread, arbitrage income and yen appreciation risk.The current federal funds rate of the Federal Reserve is 4.50%, the Japanese yen benchmark interest rate is -0.1%, and the interest rate difference between the United States and Japan is as high as 4.6%. Huang Jinwen told a reporter from China Times that this is the golden moment for foreign exchange spread trading. However, the appreciation of the yen will increase the risk of carry trade: investors borrow low-valued yen for financing . Once the yen appreciates, they will incur exchange rate losses when repaying the financing currency, which may exceed the benefits brought by the interest rate difference. Therefore, it is very important to hedge exchange rate risks through foreign exchange futures or options contracts .
Huang Jinwen predicts that the U.S. dollar/yen interest rate gap will exist for a long time and will not narrow at least in 2023. "However, the yen exchange rate may have bottomed out at the 150 level. The Bank of Japan has recently boosted the yen's trend through emergency intervention in the government bond market. The Federal Reserve may slow down future interest rate hikes, making the dollar weaker."
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