Shigeru Ishiba, Japan’s prime minister and president of the Liberal Democratic Party (LDP), at the party’s headquarters following the lower house election, at the party’s headquarters in Tokyo, Japan, on Sunday, Oct. 27, 2024.
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Japanese Prime Minister Shigeru Ishiba on Monday signaled that he intends to continue running the government after his Liberal Democratic Party and its coalition partner Komeito lost a majority in the lower house following a snap election.
“We will continue to advance national politics in a steady manner,” Ishiba said at a news conference at party headquarters in Tokyo, according to local news. “National politics cannot stagnate for even one moment.”
Ishiba promised to work on an economic stimulus package, and added that the party needs to recognize the reasons behind the oppositions’ gains.
Japan’s ruling coalition lost its parliamentary majority after voters cast their ballots on Sunday to determine control of the lower house. The election marked the first time since 2009 that the LDP has lost its majority.
“Our party fought hard all over the country under the slogan ‘Protect Japan, Turn growth into strength,’” the LDP said in a statement. “However, the party was unable to dispel the public’s distrust over the political funding issue, resulting in a harsh result.”
In various media interviews as votes were being counted, Ishiba had said: “We will humbly and solemnly accept the harsh judgment.”
After markets opened on Monday, Japan’s benchmark Nikkei 225 rose 1.79%, leading gains in Asia, while the Topix was up 1.38%. The moves were supported by a weaker yen, which fell 0.65% to trade at 153.28.
Ishiba succeeded Fumio Kishida as prime minister on Oct. 1 and called for a snap general election on Sept. 30 after winning the party’s internal vote against rival Sanae Takaichi.
On the campaign trail, Ishiba had vowed to reduce the burden on households suffering from rising living costs and showed intentions to boost rural revitalization, as Japan’s countryside suffers from a broader demographic crisis and an aging population.
David Roche, a strategist at Quantum Strategy, said Ishiba is now a “dead man walking” with his Liberal Democratic Party “very likely to lose power completely or see its power very diluted in a messy coalition after an even messier protracted period of haggling.”
“What is sure is that policy uncertainty will rule while the haggling goes on,” he said in a flash research note Sunday night, predicting the yen to weaken from here.
“Equities will mark time (the bull period is over anyway). JGBs [government bonds] will stagnate waiting to learn about the next bout of futile fiscal largesse or lack of it,” he added.
JP Morgan headquarters at Canary Wharf financial district at the heart of Canary Wharf financial district on 6th February 2024 in London, United Kingdom.
Mike Kemp | In Pictures | Getty Images
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
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Tough environment for European companies China’s environment for businesses is so thorny that European companies have grown discouraged with operating in the country, according to the EU Chamber of Commerce. If European companies were to invest in China further, Beijing must act on its pledges to improve the business conditions, the chamber’s paper wrote.
Big price reports The U.S. consumer price index for August comes out later today, while the producer price index, which measures prices at the wholesale level, will be released a day later. They’re the last major economic data the Federal Reserve will receive — and hence influence its decision on the size of cuts — before its meeting next week.
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As rates fall, borrowing becomes cheaper. For the consumer, that’s most felt in areas like housing; for companies, it tends to boost spending on expansion and investment.
Those acts trigger a virtuous cycle of spending, boosting consumption and growth, which in turns increases employment. The economy loves lower rates too and swells up.
There’s one industry, however, that generally enjoys higher interest rates: banking.
One way banks make money is through the net interest income. That’s the difference between the interest rate they charge on loans and the rate they offer on savings. As rates rise, banks can raise the former, which is a revenue source, while keeping the latter, a cost, low.
With rate cuts looming on the horizon, however, that age of abundance is coming to an end for big banks.
JPMorgan poured cold water on the market’s expectation of around $90 billion for NII in 2025. That number “is not very reasonable” because the Fed will cut rates, said JPMorgan President Daniel Pinto.
If the biggest bank in the U.S. thinks it can’t keep loan rates high, it’s hard to imagine smaller banks can maintain juicy NII of the previous years.
Investors didn’t take JPMorgan’s caution warmly. Its shares lost around 5% and weighed down the Dow Jones Industrial Average, which declined 0.23%.
Japan’s central bank has raised its benchmark interest rate to “around 0.25%” from its previous range of 0% to 0.1% and outlined its plan to taper its bond buying program.
This would mark the Bank of Japan’s highest interest rates since 2008.
The central bank forecasts that the core inflation rate — which strips out prices of fresh food — will reach 2.5% by the end of the 2024 fiscal year, and “around 2%” for the 2025 and 2026 fiscal years.
The BOJ said it will continue to raise the policy interest rate and adjust the degree of monetary accommodation, assuming its economic outlook is realized.
Japan’s fiscal year runs from April 1 to March 31, which means the 2024 fiscal year will end on March 2025.
The Bank of Japan said that it will reduce the monthly outright purchases of Japanese government bonds to about 3 trillion yen ($19.64 billion) per month in the January to March 2026 quarter. As of its March release, the bank said that purchases of JGB’s amounted to about 6 trillion yen per month.
The amount is now planned to be cut by around 400 billion yen per quarter, the BOJ added, which will bring the total JGB holdings down by about 7% to 8% by the 2026 fiscal year. The BOJ’s JGB holdings currently stand at a whopping 579 trillion yen as of July 19, according to CNBC’s calculations.
However, the central bank emphasized that it will be flexible in this plan and will conduct an interim assessment of the reduction plan at the June 2025 meeting.
“The Bank will make nimble responses by, for example, increasing the amount of JGB purchases,” and added that it is “prepared to amend the plan at the MPMs, if deemed necessary.”
Following the decision, both the Nikkei 225 and the Topix gained 0.28% and 0.51% respectively, while the Japanese yen strengthened marginally to 152.72.
In its statement, the BOJ pointed out that Japan’s economic activity and prices have been developing “generally in line with the outlook presented” in April.
The central bank noted that moves to raise wages have not only been seen in large firms, but have also spread to smaller firms.
The Japanese Trade Union Confederation, commonly known as Rengo, said on July 3 that big firms with 300 or more union-backed employees had raised wages by 5.19%, while small firms had increased pay by 4.45%. This marked the largest wage hike in 33 years, the union said.
The BOJ has repeatedly stated that it aims to form a “virtuous cycle” of increasing prices and wages.
The central bank said business fixed investment has been on a “moderate increasing trend” and corporate profits have been improving, while private consumption has been resilient despite the impact of price rises and other factors.
In light of these factors, the central bank slightly lowered its GDP growth forecast for the 2024 fiscal year to a range of 0.5%-0.7%, down from April’s forecast of 0.7%-1%. This was due to previously announced downward revisions of the 2023 GDP numbers.
Both GDP and inflation expectations for the 2025 and 2026 fiscal year remained largely similar.
Cherry trees in bloom near the Nippon Budokan in Tokyo, Japan, on Sunday, April 7, 2024.
Bloomberg | Bloomberg | Getty Images
Asia-Pacific markets rose on Wednesday after the Dow Jones Industrial Average and the S&P 500 closed at record highs overnight as traders become increasingly bullish on interest rate cuts.
Japan’s Nikkei 225 rose 0.23%, while the Topix was up 0.44% after the Reuters Tankan survey showed an increase in business optimism among large Japanese manufacturers.
The manufacturing index was at +11, up from +6 in the previous month. However, confidence among non-manufacturers dipped from +31 to +27.
Separately, Japanese authorities likely intervened in the currency market last Thursday and Friday, spending a total of 6 trillion yen ($37.9 billion) over the two days, according to Reuters.
The yen is currently at 158.3 against the U.S. dollar. The currency weakened to 161.82 last Wednesday before strengthening to as much as 157.41 the following day.
Australia’s S&P/ASX 200 gained 0.29%, just shy of its all time high of 8,037.3 points.
South Korea’s Kospi was trading close to the flatline, and the small-cap Kosdaq climbed 0.14%.
Hong Kong’s Hang Seng index futures were at 17,843, higher than the HSI’s last close of 17,727.98.
Singapore’s non-oil domestic exports slipped more than expected in June, marking a fifth straight month of declines. They fell 8.7% year on year compared to a 1.2% decline expected by economists polled by Reuters.
On a month-on-month basis, Singapore’s non-oil domestic unexpectedly dropped 0.4%, compared with a expectations of a 4.1% growth.
Overnight, the Dow blue-chip index gained 1.85%, closing at 40,954.48, while the broad-based S&P 500 added 0.64% to wrap the day at 5,667.20. The Nasdaq Composite rose 0.20%.
Sheets of newly-designed Japanese 10,000 yen banknotes move through a machine at the National Printing Bureau Tokyo plant in Tokyo, Japan, on Wednesday, June 19, 2024. Persistent weakness in the yen is raising concerns about the potential for a resurgence in cost-push inflation, likely weighing on private consumption.
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The Japanese yen hit a near-38 year low against the U.S. dollar late Wednesday, raising expectations that authorities could intervene in currency markets again.
The yen weakened to 160.82 against the greenback according to FactSet data, breaching the previous record of 160.03 on April 29 and reaching its weakest level since 1986.
The last time the yen crossed the 160 level, the currency subsequently strengthened sharply during the trading session, prompting analysts to speculate about an intervention.
Japan’s Ministry of Finance later confirmed the intervention in May, saying that it had spent 9.7885 trillion yen ($62.25 billion) on currency intervention between April 26 and May 29, according to a Google-translated statement.
That was the first time that the Japanese government has undertaken such a market measure since October 2022, according to ministry records.
Carol Kong, economist and currency strategist at the Commonwealth Bank of Australia, is of the view that “we may be closer to another FX intervention.”
She also said that the U.S. May personal consumption expenditures data — set to be released on Friday — might provide a catalyst for Japan to intervene if it is stronger than expected and pushes the USD/JPY pair sharply higher.
Reuters reported that Kanda said Japanese authorities were “seriously concerned and on high alert” about the yen’s rapid decline.
“It is generally accepted that the current weakness in the yen is not necessarily justified, therefore believed to be driven by speculators,” Kanda told reporters on Wednesday. He added that authorities “have been preparing to act against excessive volatility.”
— CNBC’s Ruxandra Iordache and Sam Meredith contributed to this report.
Pedestrians cross an intersection in the Shibuya district of Tokyo, Japan, on Tuesday, April 25, 2023. Photographer: Kentaro Takahashi/Bloomberg via Getty Images
The country’s core inflation rate — which strips out prices of fresh food — came in at 2.5%. A Reuters poll of economists expected the May core inflation reading to come in at 2.6%, compared with April’s 2.2%.
The so-called “core-core” inflation, which strips out prices of fresh food and energy, came in at 2.1%. This is lower than April’s reading of 2.4%. The metric is considered by the Bank of Japan when formulating the country’s monetary policy.
Japan’s headline rate rose to 2.8%, higher than April’s figure of 2.5%.
Japan’s Nikkei 225 rose 0.03%, while the broad-based Topix gained 0.21%.
Softbank — the third heaviest weighted stock on the index — saw shares drop 2.87% after Softbank Group CEO Masayoshi Son said the company needed “immense capital” to develop AI robotics.
The yen weakened for a seventh straight day, declining to 158.95 against the U.S. dollar.
Japan’s chief currency diplomat, Masato Kanda, said the government was ready to make a move against the volatile currency market that has hurt the economy, Reuters reported.
India’s benchmark Nifty 50 index gained 0.1% to hit a new record high.
HSBC flash Composite Purchasing Managers’ Index for India rose to 60.9 in June from 60.5 in May. The data complied by S&P Global showed that growth was stronger at goods producers compared to service providers.
South Korea’s Kospi fell 0.94%, while the small-cap Kosdaq lost 0.54%.
Separately, the country announced that the finance ministers of South Korea and Japan will meet on June 25 to discuss bilateral and multilateral cooperation, as well as their views on the global economy. The meeting will be held two months after both parties agreed to manage excessive currency volatilities during their meeting in Washington.
Mainland China’s CSI 300 dipped 0.60%, while Hong Kong’s Hang Seng index declined 1.71%.
Overnight in the U.S., the S&P 500 closed 0.25 % lower after hitting a new high. The Nasdaq Composite dipped 0.79%, while the Dow Jones Industrial Average climbed 0.77%. Nvidia slipped 3.5% after rising earlier in the trading day.
—CNBC’s Samantha Subin and Brian Evans contributed to this report.
Vehicles travel along a highway past commercial and residential buildings in Tokyo, Japan, on Wednesday, Feb. 8, 2023.
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Foreign investments into Japan’s real estate sector have been flourishing in the past year, buoyed by a weak Japanese yen as the country’s central bank maintains its ultra-loose monetary policy.
“It is a golden period of Japanese real estate,” Henry Chin, head of Asia-Pacific research at CBRE, told CNBC.
“Japan benefits from an ultra-loose monetary policy while global economies are in the tightening cycle,” he added, citing the level of transparency and “strong fundamentals” in the retail and multifamily sector to be a key factor. Multifamily properties are buildings or complexes that have more than one rentable unit unlike single-family properties with only a single space.
Boosting the demand for Japan’s property sector is the country’s favorable lending terms, where the loan-to-value ratio stands at 70% and the cost of lending hovers around 1%, Chin explained.
Foreign investor volume saw 100% increase in Q1 2023 on a year-on-year basis.
Koji Nato
LL’s Research Director of Capital Markets in Japan
And of course, a cheap Japanese yen.
The Bank of Japan’s monetary position to hold benchmark interest rates at -0.1% sets them apart from other major central banks, which have lifted rates in the last two years in efforts to tame spiraling inflation. Consequently, the yen has weakened more than 11% against the U.S. dollar this year so far.
“Foreign investor volume saw 100% increase in Q1 2023 on a year-on-year basis,” JLL’s Research Director of Capital Markets in Japan, Koji Nato, told CNBC via e-mail.
Real estate deal activity in Japan has been among the strongest in the world this year, JLL said in a recent note, similarly attributing the robustness to the interest rate policy that “has been widely credited for keeping its real estate resilient.”
Foreign investors almost doubled their investment from a year ago to $2 billion in the first quarter of the year, the global real estate services company noted.
According to latest data provided by CBRE, total foreign investments into Japan’s real estate market has risen 45% in the first half of 2023, compared to the same period last year.
“Given the limited availability of new hotel rooms in the foreseeable future, the upward trend in occupancy rates is anticipated to continue,” Knight Frank’s note continued.
In addition, hospitality investments were given a sharp boost following the greenlighting of the construction of Japan’s integrated resorts in Osaka, which would mark the country’s first casino. The project is aimed at drawing both international tourist and domestic spending
The Japanese logistics sector has also experienced “impressive growth,” fueled by the strong performance of e-commerce, Knight Frank noted. The logistics sector encompasses distribution centers, warehouses and other spaces with storage facilities.
For CBRE’s Chin, the retail sector is seeing the strongest rental growth. Chin also elaborated that investors are looking at prime and secondary markets in Tokyo and Osaka where demand for leases is coming back, alongside the return of tourists.
Singapore is the largest source of cross-border investments into Japanese commercial real estate in 2023, with $3 billion worth of acquisitions year-to-date, said Knight Frank’s Head of APAC Research Christine Li.
U.S. investment into Japan came in second place at $2.58 billion, and Canada with $1 billion worth of investments, according to data from Knight Frank.
So how long will investments continue to pour in?
A view of the historic Shinchaya Inn on the Nakasendo Way on November 7, 2022 in the post towns of Magome, Japan.
David Madison | Getty Images News | Getty Images
“A tightening decision can deflate investor sentiment in the short term,” Li forecasts, but she highlighted that a policy shift due to evidence of broadening inflation can extend the bullish outlook.
CBRE’s Chin highlighted how it is hard to predict the turning point, and noted how prices can be “extremely sensitive” to any interest rate hikes and relative pricing of real estate in other countries’ markets. However, he remains optimistic.
“We expect to see investors continue to deploy capital into Japan and it is unlikely to change in the coming few quarters,” he said.
A pedestrian walks past the Bank of Japan (BoJ) building in central Tokyo on July 28, 2023.
Richard A. Brooks | Afp | Getty Images
The Bank of Japan announced it’s increasing its bond purchases at Wednesday’s auction, as a spike in government bond yields tests its resolve to defend its yield curve control policy.
In a statement Monday, the Japanese central bank said it will conduct an unspecific amount of additional purchases of Japanese government bonds with tenures of more than five years and up to 10 years. This adds to the BOJ’s reported 300 billion yen Friday bond purchase with similar maturities.
Yields on 10-year Japanese government bonds hit as much as 0.775% Monday, its highest since September 2013 and nearing the BOJ’s hard 1% cap. The Japanese yen shed nearly 0.3% to about 149.73 yen against the dollar, nearing the 150 yen level that prompted BOJ intervention last year.
Hawkish comments in the minutes of a lively BOJ September policy meeting released earlier Monday reignited expectations the BOJ is slowly laying the groundwork for the end to negative interest rates.
At its policy meeting in July, the BOJ loosened its yield curve control to allow longer term rates to move more in tandem with rising inflation in Governor Kazuo Ueda’s first policy change since assuming office in April.
The move to broaden the permissible range for 10-year JGB yields from plus and minus 0.5 percentage point around its 0% target to 1 percentage point was seen as the start of a gradual departure from the yield curve control policy enacted by Ueda’s predecessor.
The yield curve control, known also as the YCC, is a policy tool where the central bank targets an interest rate, and then buys and sells bonds as necessary to achieve that target. It’s part of the BOJ’s ultra-loose monetary policy, which also includes keeping short-term interest rates at -0.1% in its attempts to combat decades of deflation in the world’s third-largest economy.
On Monday, a comment by an unnamed policymaker in the September BOJ meeting minutes that “the achievement of 2 percent inflation in a sustainable and stable manner seems to have clearly come in sight” partly added to the yield spike.
At the September meeting though, the BOJ eventually decided to maintain its ultra-loose policy and left rates unchanged on Friday, mindful of the “extremely high uncertainties” on the growth outlook domestically and globally.
Despite core inflation exceeding the central bank’s stated 2% target for 17 consecutive months, BOJ officials have been cautious about exiting its radical stimulus.
This is due to what the BOJ sees as a lack of sustainable inflation, deriving from meaningful wage growth that it believes would lead to a positive chain effect supporting household consumption and economic growth.
Still, the Bank of Japan could be forced into hiking rates sooner than expected if the Japanese yen weakens beyond 150 against the dollar, according to Bob Michele, global head of fixed income at JPMorgan Asset Management.
Higher rates could then unwind the yen carry trade and spark a return of Japanese capital to its domestic bond markets, a move that could trigger market volatility, he told CNBC last Thursday.
The Bank of Japan could be forced into hiking rates sooner than expected, if the Japanese yen weakens beyond 150 to the dollar.
Higher rates could then unwind the yen carry trade and spark a return of Japanese capital to its domestic bond markets, a move that could trigger market volatility.
The BOJ stands as an outlier as major central banks have hiked rates aggressively to combat burgeoning inflation. Decades of accommodative monetary policy in Japan — even as other global central banks tightened policy in the last 12 months — have concentrated carry trades in the Japanese yen.
Carry trades involve borrowing at a lower interest rate to invest in other assets that promise higher returns.
The Japanese yen slipped about 0.4% to around 148.16 against the dollar on Friday after the BOJ kept its negative rates unchanged, after the yen tested its lowest in almost 10 months at 148.47 per dollar Thursday.
The Japanese currency is under renewed pressure after the U.S. Federal Reserve on Wednesday held interest rates, and indicated it expects one more hike by year’s end. The yen has now weakened more than 11% against the greenback this year to date.
“I think where their hand could be forced is looking at dollar-yen. We’re awfully close to 150 … when that starts to get to 150 and higher, then they have to step back and think: the selloff in the yen is now starting to import probably more inflation than we want,” Bob Michele, global head of fixed income at JP Morgan Asset Management, told CNBC Thursday before the rate decision.
While a weaker yen makes Japanese exports cheaper, it also makes imports more expensive, given that most major economies are struggling to contain stubbornly high inflation.
“So, it may give them cover to start hiking rates sooner than the market’s expecting,” Michele added.
An electronic quotation board displays the yen’s rate 145 yen level against the US dollar at a foreign exchange brokerage in Tokyo on September 22, 2022.
Str | Afp | Getty Images
The BOJ had in July loosened its yield curve control to broaden the permissible range for 10-year Japanese government bond yields of around plus and minus 0.5 percentage points from its 0% target to 1% in Governor Kazuo Ueda’s first policy change since assuming office in April.
Yield curve control, the so-called YCC, is a policy tool where the central bank targets an interest rate, and then buys and sells bonds as necessary to achieve that target.
Economists have been watching for more changes to the BOJ’s yield curve control policy, part of the Japanese central bank’s efforts to reflate growth in the world’s third-largest economy and sustainably achieve its 2% inflation target after years of deflation.
Expectations of a quicker exit from the BOJ’s ultra-loose monetary policy spiked after Ueda told Yomiuri Shimbun in an interview published Sept. 9 that the BOJ could have sufficient data by the end of this year to determine when to end negative rates.
After that report, many economists brought forward their forecasts for policy tightening to sometime in the first half of 2024.
Central bank officials have been cautious about exiting its ultra-loose policy, even though core inflation has exceeded the BOJ’s stated 2% target for 17 consecutive months.
This is due to what the BOJ sees as a lack of sustainable inflation, deriving from meaningful wage growth that it believes would lead to a positive chain effect supporting household consumption and economic growth.
But there are inherent risks when the BOJ finally decides to tighten rates.
“Japan has been the mother of the carry trade for decades now and so much capital has been funded at a very low cost in Japan and exported to foreign markets,” Michele said.
With 10-year JGB yields hitting its highest in a decade at about 0.745% Thursday, Japanese investors have been starting to unwind positions across various asset classes in various foreign markets that used to offer better returns in the past.
“I worry as the yield curve normalizes and rates go up, you could see a decade — or longer — of repatriation,” he added. “This is the one risk I worry about.”
Containers in a shipping terminal at the Honmoku pier in Yokohama, Japan, on Monday, June 19, 2023.
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Japan posted its first monthly decline in exports in more than 2 years, as weaker demand in its biggest trading partners in China and the rest of Asia dimmed prospects for growth in the world’s third-largest economy.
Exports fell 0.3% in July from a year earlier for the first time since February 2021, according to provisional data released Thursday by Japan’s Ministry of Finance. Exports to Asia plunged almost 37%, while those to China contracted 13.4% in an eighth consecutive monthly decline, underscoring the magnitude of the slowdown in the mainland.
“Luckily at this moment, [the weakness in China exports] is completely offset by increase in exports to U.S. and Europe, but as you know, there are a lot of uncertainties with regard the U.S. and European economies,” Sayuri Shirai, an economics professor at Keio University, told CNBC “Squawk Box Asia” Thursday.
Japan’s domestic demand showed no meaningful improvement, underscored by imports that slumped 13.5% in July. Both export and import numbers were slightly better than expected, though Japan swung to a trade deficit of 78.7 billion yen (539.6 million dollars), falling far short of a median estimate for a 24.6 billion yen surplus.
A surge in imports had propelled a provisional 6% growth in Japan in the second quarter, though economists are expecting global demand to weaken in the second half of the year.
“I think for Japan, Japan’s exports to China counts for 20% of its total and Asia, 50%, so we have to really watch what’s happening in China,” Shirai said.
Coupled with faltering domestic demand, the Bank of Japan is unlikely to have the impetus to move away from its ultra-easy monetary policy aimed at reflating the economy.
Continued weakness in the Japanese yen is another source of concern, as the currency touched 146 yen to the dollar.
Shirai said BOJ intervention “could happen quite soon” since the Japanese yen is nearing 150 against the dollar, the level when Japan’s Finance Ministry intervened with roughly $68 billion to prop up the yen last September and October.
Separate data released by the Japanese government showed core machinery orders — regarded by some as a leading indicator of capital expenditure despite its volatility — declined 5.8% in July from a year earlier.
The central bank loosened its yield curve control — or YCC — in an unexpected move with wide-ranging ramifications. It sent the yen whipsawing against the dollar, while Japanese stocks and government bond prices slid.
Elsewhere, the Stoxx 600 in Europe opened lower and government bond yields in the region jumped. On Thursday, ahead of the Bank of Japan statement, reports that the central bank was going to discuss its yield curve control policy also contributed to a lower close on the S&P 500 and the Nasdaq, according to some strategists.
“We didn’t expect this kind of tweak this time,” Shigeto Nagai, head of Japan economics at Oxford Economics, told CNBC’s “Capital Connection.”
The Bank of Japan has been dovish for years, but its move to introduce flexibility into its until-now strict yield curve control has left economists wondering whether a more substantial change is on the horizon.
The yield curve control is a long-term policy that sees the central bank target an interest rate, and then buy and sell bonds as necessary to achieve that target. It currently targets a 0% yield on the 10-year government bond with the aim of stimulating the Japanese economy, which has struggled for many years with disinflation.
In its policy statement, the BOJ said it will continue to allow 10-year Japanese government bond yields to fluctuate within the range of 0.5 percentage point either side of its 0% target — but it will offer to purchase 10-year JGBs at 1% through fixed-rate operations. This effectively expands its tolerance by a further 50 basis points.
“While maintaining the tolerance band for the 10-year JGB yield target at +/-0.50ppt, the BoJ will allow more fluctuation in yields beyond the band,” economists from Capital Economics said.
“Their aim is to enhance the sustainability of the current easing framework in a forward-looking manner. Highlighting ‘extremely high uncertainties’ in the inflation outlook, the BoJ argues that strictly capping yields will hamper bond market functioning and increase market volatility when upside risks materialize.”
From a market perspective, investors — many of whom were not expecting this move — were left wondering whether this is a mere technical adjustment, or the start of a more significant tightening cycle. Central banks tighten monetary policy when inflation is high, as demonstrated by the U.S. Federal Reserve’s and European Central Bank’s rate hikes over the past year.
“Fighting inflation was not the official reason for the policy tweak, as that would surely imply stronger tightening moves, but the Bank recognised obstinately elevated inflationary pressure by revising up its forecast,” Duncan Wrigley, chief China+ economist at Pantheon Macroeconomics, said in a note.
The BOJ said core consumer inflation, excluding fresh food, will reach 2.5% in the fiscal year to March, up from a previous estimate of 1.8%. It added that there are upside risks to the forecast, meaning inflation could increase more than expected.
Kazuo Ueda, governor of the Bank of Japan (BOJ).
Bloomberg | Bloomberg | Getty Images
Speaking at a news conference after the announcement, BOJ Governor Kazuo Ueda played down the move to loosen its yield curve control. When asked if the central bank had shifted from dovish to neutral, he said: “That’s not the case. By making YCC more flexible, we enhanced the sustainability of our policy. So, this was a step to heighten the chance of sustainably achieving our price target,” according to a Reuters translation.
MUFG said that Friday’s “flexibility” tweak shows the central bank is not yet ready to end this policy measure.
“Governor Ueda described today’s move as enhancing the sustainability of monetary easing rather than tightening. It sends a signal that the BoJ is not yet ready to tighten monetary policy through raising interest rates,” the bank’s analysts said in a note.
Capital Economics’ economists highlighted the importance of inflation figures looking ahead. “The longer inflation stays above target, the larger the chances that the Bank of Japan will have to follow up today’s tweak to Yield Curve Control with a genuine tightening of monetary policy,” they wrote.
But the timing here is crucial, according to Michael Metcalfe of State Street Global Markets.
“If inflation has indeed returned to Japan, which we believe it has, the BoJ will find itself needing to raise rates just as hopes for interest rate cuts rise elsewhere. This should be a medium-term positive for the JPY [Japanese yen], which remains deeply undervalued,” Metcalfe said in a note.
The effectiveness of the BOJ’s yield curve control has been questioned, with some experts arguing that it distorts the natural functioning of the markets.
“Yield curve control is a dangerous policy which needs to be retired as soon as possible,” Kit Juckes, strategist at Societe Generale, said Friday in a note to clients.
“And by anchoring JGB (Japanese government bond) yields at a time when other major central banks have been raising rates, it has been a major factor in the yen reaching its lowest level, in real terms, since the 1970s. So, the BoJ wants to very carefully dismantle YCC, and the yen will rally as slowly as they do so.”
Pantheon Macroeconomics’ Wrigley agreed that the central bank is looking to move away from YCC, describing Friday’s move as “opportunistic.”
“Markets have been relatively calm and the Bank seized the opportunity to catch most investors by surprise, given the consensus for no policy change at today’s meeting,” he wrote.
“The markets are likely to test the BoJ’s resolve, as it probably will seek to engineer a gradual shift away from its [yield curve control] policy over the next year or so, while leaving the short-term rate target unchanged, as it still believes that Japan needs supportive monetary policy.”
The Japanese yen strengthened and 10-year JGB yield rose after the Bank of Japan said it would allow “greater flexibility” in its target range for 10-year Japanese government bond yields.
Yields for 10-year Japanese government bonds stood at 0.551% on the news, the level since September 2014. The yen was trading at 138.64 against the dollar at 12:35p.m. Hong Kong and Singapore time.
After a two day policy meeting, Japan’s central bank adjusted its stance on its yield curve control policy, saying that it will continue to allow 10-year government bond yields to fluctuate in the range of around plus and minus 0.5%.
The BOJ also offered to buy 10-year JGBs at 1% every business day through fixed-rate operations, unless no bids are submitted. The move effectively expands its tolerance by another 50 basis points.
Earlier, currency markets were testing the waters after Nikkei reported the BOJ will let long-term interest rates rise beyond its cap of 0.5% “by a certain degree” at its monetary policy meeting today.
Under its yield curve control policy, the central bank targets short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero.
With inflation having exceeded the BOJ’s 2% target, concerns are rising that Japan’s relatively low interest rates have made the yen less attractive and vulnerable to selling.
Central banks around the world have raised rates aggressively to rein in on inflation, but Japan has continued to maintain an ultra-loose monetary policy and kept rates low.
On Friday, the Tokyo’s core consumer price index, which excludes volatile fresh food but includes fuel costs, rose 3.0% in July from a year ago. That’s slightly more than the 2.9% expected in a Reuters consensus poll.
The debt ceiling crisis is over now that the bill has been signed , but investors still need to navigate the aftermath. There are opportunities — but also potential minefields to avoid — after the debt ceiling is lifted, such as an influx of Treasurys, according to some analysts. Here’s what they’re saying. Risk assets Paul Gambles, managing partner of the MBMG Family Office Group, said he expects “risk assets and risk currencies to briefly rally in relief” following the debt ceiling deal, but added that it creates challenges “at a portfolio level.” “While the patterns of data have been interrupted by the policy-driven economic and market interruptions of the last few years in particular, it’s not clear whether the rollercoaster ride will continue and cross-asset correlation will continue to render traditional diversification meaningless,” he added. Gambles said the debt ceiling fiasco was the “latest iteration” of a series of systemic missteps by the U.S. Federal Reserve and Treasury Department, citing aggressive asset purchase programs after the pandemic that contributed to the country’s persistent inflation. For now, he said the short-term prospects for risk assets will be “highly fragile.” U.S. Treasuries Investors should also expect “massive volatility” in short-term U.S. Treasurys following the deal, given that the Treasury needs to issue a large tranche of those bonds , Gambles warned. In a June 4 report, Citi said it expects a net increase of about $400 billion in U.S. Treasury bill issuance in the near term — the bulk of it in short-duration bills. “Such a heavy supply of ‘risk free’ high yielding Treasuries is competition for investor assets of every sort,” Citi said, adding that with six-month bills now yielding near 5.5%, the bulk of the borrowing will initially be focused in the highest-yielding, least risky Treasurys. “This is more likely than not to effectively tighten financial conditions in the period just ahead,” it concluded, adding that other markets are likely to perform poorly “for a time.” ‘Biggest beneficiaries’ The “biggest beneficiaries” in the current market are likely to be gold miners and long-duration Treasurys, Gambles said, adding: “That’s where we’re really going to see the price hikes.” He said the Japanese yen is also a buy. “If you still believe that U.S. policymakers have got it covered, and this is the first time that they’re going to successfully engineer a soft landing, I think that those provide portfolio insurance,” he told CNBC. “If you think that there’s a high risk that they’re gonna get it wrong, then the best sectors to be in [are] gold miners and zero coupon 25-year Treasurys.” Citi, meanwhile, said that opportunities could emerge in non-U.S. debt — especially higher-yielding, investment-grade emerging market bonds. U.S. banks However, Citi analysts also cautioned that there is the potential for higher Treasury yields to siphon deposits away from the weaker U.S. banks. “A shift from bank deposits to U.S. Treasuries should not necessarily result in new bank failures, but the systemic risk for banks may rise again despite the 4.8% rally in regional bank shares this week,” said Citi. The bank’s analysts urged investors to be wary of the most vulnerable banks, especially those whose portfolios contain a high percentage of commercial real estate loans. Small and mid-caps Citi noted that small-cap stocks are tied to the performance of regional banks. However, the bank said they could recover once regional bank shares do better on the back of stabilizing economic conditions. “While it may be a bit premature to add [small and mid cap shares] during the Treasuries borrowing boom, quality small cap value shares look compelling at current levels with a multiyear time horizon,” the bank said, adding that profitable small-cap names are now trading at a 26% discount to their larger peers. “In 2024, when the Fed pivots, we also expect a catch-up in small cap growth shares, led by non-cyclical health care and technology firms. Remember that ‘bearish investors’ have a record amount of sidelined money to put to work,” Citi added.
Calls to move away from relying on the U.S. dollar for trade are growing.
More and more countries — from Brazil to Southeast Asian nations — are calling for trade to be carried out in other currencies besides the U.S. dollar.
The U.S. dollar has been king in global trade for decades — not just because the U.S. is the world’s largest economy, but also because oil, a key commodity needed by all economies big and small, is priced in the greenback. Most commodities are also priced and traded in U.S. dollars.
But since the Federal Reserve embarked on a journey of aggressive rate hikes to fight domestic inflation, many central banks around the world have raised interest rates to stem capital outflows and a sharp depreciation of their own currencies.
“By diversifying their holdings reserves into a more multi-currency sort of portfolio, perhaps they can reduce that pressure on their external sectors,” said Cedric Chehab from Fitch Solutions.
To be clear, the U.S. dollar remains dominant in global forex reserves even though its share in central banks’ foreign exchange reserves has dropped from more than 70% in 1999, IMF data shows.
The U.S. dollar accounted for 58.36% of global foreign exchange reserves in the fourth quarter last year, according to data from the IMF’s Currency Composition of Foreign Exchange Reserves (COFER). Comparatively, the euro is a distant second, accounting for about 20.5% of global forex reserves while the Chinese yuan accounted for just 2.7% in the same period.
Based on CNBC’s calculation of IMF’s data on 2022 direction of trade, mainland China was the largest trading partner to 61 countries when combining both imports and exports. In comparison, the U.S. was the largest trading partner to 30 countries.
“As China’s economic might continues to rise, that means that it’ll exert more influence in global financial institutions and trade etc,” Chehab told CNBC last week.
China — long among the top 2 foreign holders of U.S. Treasurys — has been steadily reducing its holdings of U.S. Treasury securities.
Analysts say changing global economic dynamics are driving the co-called de-dollarization trend which can benefit local economies in a number of ways.
Trading in local currencies “allow exporters and importers to balance risks, have more options to invest, to have more certainty about the revenues and sales,” former Brazilian ambassador to China, Marcos Caramuru, told CNBC last week.
Another benefit for countries moving away from using the dollar as the middle man in bilateral trade, is to “help them move up the value chain,” said Mark Tinker from ToscaFund Hong Kong told CNBC “Street Signs Asia” early April.
“It isn’t about selling cheap stuff to Walmart, keeping down the prices for American consumers in order to earn dollars to buy its energy. This is now about actually a completely bilateral trade bloc,” Tinker said.
Meanwhile, growth of non-U.S. economic blocs also encourage these economies to push for wider use of their currencies. The IMF estimates that Asia could contribute more than 70% to global growth this year.
“U.S. growth might slow, but U.S. growth isn’t what it’s all about anymore. There is a whole non-U.S. block that’s growing,” said Tinker. “I think there is going to be a re-internationalization of flows.”
Geopolitical risks have also accelerated the trend to move away from U.S. dollar.
“Political risk is really helping introduce a lot of uncertainty and variability around how much of a safe haven that U.S. dollar really is,” said Galvin Chia from NatWest Markets told “Street Signs Asia” earlier.
Tinker said what accelerated the calls for de-dollarization was the U.S. decision to freeze Russia’s foreign currency reserves after Moscow invaded Ukraine in February 2022.
The yuan has reportedly replaced the U.S. dollar as the most traded currency in Russia, according to Bloomberg.
So far, the U.S. and its western allies have frozen more than $300 billion of Russia’s foreign currency reserves and slapped multiple rounds of sanctions on Moscow and the country’s oligarchs. This forced Russia to switch trade toother currencies and increase gold in its reserves.
Although analysts don’t anticipate a complete break away from dollar-denominated oil trade over the short-term, “I think what they’re saying more is, well, there’s another player in town, and we want to look at how we trade with them on a bilateral basis using yuan,” said Chehab.
Despite the slow erosion of its hegemony, analysts say the U.S. dollar is not expected be dethroned in the near future — simply because there aren’t any alternatives right now.
“Euro is somewhat an imperfect fiscal and monetary union, the Japanese yen, which is another reserve currency, has all sorts of structural challenges in terms of the high debt loads,” Chehab told CNBC.
The Chinese yuan also falls short, Chehab said.
“If you look at the yuan reserves as a share of total reserves, it’s only about 2.5% of total reserves, and China still has current account restrictions,” Chehab said. “That means that it’s going to take a long time for any other currency, any single currency to really usurp the dollar from that perspective.”
Data from IMF shows that as of the fourth quarter of 2022, more than 58% of global reserves are held in U.S. dollar — that’s more than double the share of the euro, the second most-held currency in the world.
The international reserve system “is still a U.S.-reserve dominated system,” said NatWest’s Chia.
“So long as that commands the majority, so long as you don’t have another currency system or economy that’s willing to step up to that international reach, convertibility and free floating and the responsibility of a reserve currency, it’s hard to say dollar will be displaced over the next 3 to 5 years. unless someone steps up.”
— CNBC’s Joanna Tan and Monica Pitrelli contributed to this report.
The banking turmoil of March, which saw the collapse of several regional U.S. lenders, will lead to a credit crunch for “small-town America,” according to veteran strategist David Roche.
Earnings reports last week indicated that billions of dollars of deposit outflows from small and mid-sized lenders, executed amid the panic, were redirected to Wall Street giants — with JPMorgan Chase, Wells Fargo and Citigroup reporting massive inflows.
“I think we’ve learned that the big banks are seen as a safe haven, and the deposits which flow out of the small and regional banks flow into them (big banks), but we’ve got to remember in a lot of key sectors, the smaller banks account for over 50% of lending,” Roche, president of Independent Strategy, told CNBC’s “Squawk Box Europe” on Thursday.
“So I think, on balance, the net result is going to be a further tightening of credit policy, of readiness to lend, and a contraction of credit to the economy, particularly to the real economy — things like services, hospitality, construction and indeed small and medium-sized enterprises — and we’ve got to remember that those sectors, the kind of small America, small-town America, account for 35 or 40% of output.”
Central banks in Europe, the U.S. and the U.K. sprang into action to reassure that they would provide liquidity backstops, to prevent a domino effect and calm the markets.
Roche, who correctly predicted the development of the Asian crisis in 1997 and the 2008 global financial crisis, argued that, alongside their efforts to rein in sky-high inflation, central banks are “trying to do two things at once.”
“They’re trying to keep liquidity high, so that the problems of deposit withdrawals and other problems relating to mark-to-market of assets in banks do not cause more crises, more threats of systemic risk,” he said.
“At the same time, they’re trying to tighten monetary policy, so, in a sense, you’ve got a schizophrenic personality of every central bank, which is doing with the right hand one thing and doing with the left hand the other thing.”
He predicted that this eventually results in credit tightening, with fear transmitting to major commercial banks that receive fleeing assets and “don’t want to be caught up in a systemic crisis” and will be more cautious on lending.
Roche does not anticipate a full-scale recession for the U.S. economy, although he is convinced that credit conditions are going to tighten. He recommended investors should take a conservative approach against this backdrop, parking cash in money market funds and taking a “neutral to underweight” position on stocks, which he said were at the “top of the crest” of their latest wave.
“We will probably go down from here, because we will not get rapid cuts in interest rates from central banks,” he said.
Investors assume long positions by buying assets whose value they expect to increase over time. Short positions are held when investors sell securities they do not own, with the expectation of purchasing them at a later date at a lower price.
Despite commodities not yielding much this year, Roche is sticking to long calls on grains, including soya, corn and wheat.
“Beyond the geopolitical risks which are still there, the supply and demand balances for those products looking out five years is very good,” he said.
People cross a street in Tokyo’s Ginza district. The Bank of Japan left its monetary policy unchanged on Wednesday.
Philip Fong | Afp | Getty Images
The Japanese yen pushed higher against both the euro and U.S. dollar on Friday after a Nikkei report said Kazuo Ueda would be appointed as the Bank of Japan’s next governor.
Economist Ueda is a former member of the central bank’s policy board.
The dollar fell 1% on the day against the yen to 130.28, around a one-week low, while the euro was also down 1% to 139.9, a three-week low.
Ueda would replace Haruhiko Kuroda, whose term started on March 20, 2013, and will end on April 8, 2023. Kuroda has overseen the BOJ’s policy of maintaining its ultra-low interest rates while other major central banks have been hiking to tackle inflation.
Though a weaker yen is generally seen as a benefit to Japanese policymakers as they try to stimulate inflation, the extent of the depreciation and price pressures on consumers have forced several interventions to shore up the currency.
Kuroda has defended the BOJ’s yield curve control policy, which keeps its tolerance range for the yield in a tight range. The BOJ jolted global markets in December when it widened the yield on the 10-year Japanese government bond to move 50 basis points either side of its 0% target, up from 25 basis points.
US dollar vs Japanese yen.
On Tuesday, the government will officially nominate Ueda, according to the Nikkei report, along with BOJ Executive Director Shinichi Uchida and former chief of the Financial Services Agency Ryozo Himino as deputy governors.
Jane Foley, head of FX strategy at Rabobank London, said Ueda had not been considered a leading candidate by many BOJwatchers.
“While the market is reacting to the fact that the new Governor is not [Bank of Japan Deputy Governor Masayoshi] Amaniya – a known dove, we suspect that the policies of the BoJ will not be all that different going forward,” she told CNBC in emailed comments.
“The BoJ has been attempting to nurture inflation and whilst conditions are building to allow for some reduction of stimulus, there is unlikely to be an aggressive change.”
Amamiya was approached for the job and turned it down, according to the Nikkei report.
“Ueda seems a very different type from Kuroda, in terms of being an academic who would plainly conduct policy based on actual economic fundamentals and value conversations with the market,” said Hiroaki Muto, an economist at Sumitomo Life Insurance Co., in a note published by Reuters.
However, Muto added, he may not be a “super hawkish type” — so any “normalization” would take place very slowly.
Bank of Japan Governor Haruhiko Kuroda on Friday defended the central bank’s decision to widen the trading band in its yield curve control program and committed to continuing the BOJ’s “extremely accommodative” expansionary monetary policy.
Speaking during a panel session at the World Economic Forum in Davos, Switzerland, Kuroda said it was “not wrong” for the BOJ’s board to widen its tolerance range for the yield on its 10-year government bond from 25 basis points to 50 basis points last month.
Since the move, 10-year JGB benchmark yields have exceeded the upper ceiling several times.
His comments at Davos come shortly after the central bank defied market expectations by sticking to a core tenet of its ultra-loose monetary policy.
The BOJ on Wednesday opted to keep its ultra-dovish -0.1% interest rate unchanged and maintained its yield curve tolerance band. The decision prompted the Japanese yen to fall against the U.S. dollar and followed weeks of bond market turmoil during which yields jumped.
It leaves the BOJ at odds with other major central banks, which have hiked interest rates in a bid to tackle rising inflationary pressure.
Japan’s inflation rate jumped to a fresh 41-year high in December. The rate is still relatively low when compared to some other countries. Nonetheless, the world’s third-largest economy reported core consumer prices rose to 4% on an annualized basis in the final month of last year, double the central bank’s target of 2%.
Morning commuters in front of the Bank of Japan headquarters in Tokyo, Japan, on Jan. 16, 2023.
Bloomberg | Bloomberg | Getty Images
“We expect, probably from February this year, inflation rates start to decline and [in] fiscal year 2023 as a whole, [the] inflation rate will be less than 2%. So, we decided to maintain the current extremely accommodative monetary policy for the time being,” Kuroda said, largely attributing rising inflation to an import price hike.
“Our hope is that wages start to rise and that could make [the] 2% inflation target to be met in a stable and sustainable manner, but we have to wait for some time,” he added.
Alongside bond market turmoil, rising inflation is likely to amplify pressure on Kuroda, who is slated to retire in early April, to end the central bank’s ultra-loose monetary policy.
Asked whether he had any regrets during his almost decade-long reign, Kuroda replied, “I think in the last nearly 10 years during which I have been governor of the Bank of Japan we tried to eradicate deflation and that certainly we have been successful in eradicating … And we tried to recover economic growth.”
“All in all, I think the government’s policy coupled with the Bank of Japan’s extremely accommodative monetary policy has been successful in changing the Japanese economic structure and growth prospect, but unfortunately 2% inflation target has not been achieved in a sustainable and stable manner,” Kuroda said.
The central bank caught markets off guard by tweaking its yield curve control (YCC) policy to allow the yield on the 10-year Japanese government bond (JGB) to move 50 basis points either side of its 0% target, up from 25 basis points previously, in a move aimed at cushioning the effects of protracted monetary stimulus measures.
In a policy statement, the BOJ said the move was intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.”
The central bank introduced its yield curve control mechanism in September 2016, with the intention of lifting inflation toward its 2% target after a prolonged period of economic stagnation and ultralow inflation.
The BOJ — an outlier compared with most major central banks — also left its benchmark interest rate unchanged at -0.1% on Tuesday and vowed to significantly increase the rate of its 10-year government bond purchases, retaining its ultra-loose monetary policy stance. In contrast, other central banks around the world are continuing to hike rates and tighten monetary policy aggressively in an effort to rein in sky-high inflation.
The YCC change prompted the yen and bond yields around the world to rise, while stocks in Asia-Pacific tanked. Japan’s Nikkei 225 closed down 2.5% on Tuesday afternoon. The 10-year JGB yield briefly climbed to more than 0.43%, its highest level since 2015.
By midafternoon in Europe, the U.S. dollar was down 3.3% against the surging yen. The yen’s rally saw the currency notch the biggest single-day gain against the U.S. dollar since March 1995 (27 years, eight months, 20 days), according to FactSet currency data.
U.S. Treasury yields spiked, with the 10-year note climbing by around 7 basis points to just below 3.66% and the 30-year bond rising by more than 8 basis points to 3.7078%. Yields move inversely to prices.
Shares in Europe retreated initially, with the pan-European Stoxx 600 shedding 1% in early trade before recovering most of its losses by late morning. European government bonds also sold off, with Germany’s 10-year bund yield up almost 7 basis points to trade at 2.2640%, having slipped from its earlier highs.
“The decision is being read as a sign of testing the water, for a potential withdrawal of the stimulus which has been pumped into the economy to try and prod demand and wake up prices,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“But the Bank is still staying firmly plugged into its bond purchase program, claiming this is just fine tuning, not the start of a reversal of policy.”
That sentiment was echoed by Mizuho Bank, which said in an email Tuesday that the market moves reflect a sudden flurry of bets on a hawkish policy pivot from the BOJ, but argued that the “popular bet does not mean that is the policy reality, or the intended policy perception.”
“Fact is, there is nothing in the fundamental nature of the move or the accompanying communique that challenges our fundamental view that the BoJ will calibrate policy to relieve JPY pressures, but not turn overtly hawkish,” said Vishnu Varathan, head of economics and strategy for the Asia and Oceania Treasury Department at Mizuho.
“For one, there was every effort made to emphasize that policy accommodation is being maintained, whether this was in reference to intended as well as potential step-up in bond purchases or suggesting no further YCC target band expansion (for now).”
The Bank of Japan noted in its statement that since early spring, market volatility around the world had risen, “and this has significantly affected these markets in Japan.”
“The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets,” it added.
The central bank said if these market conditions persisted, it could have a “negative impact on financial conditions such as issuance conditions for corporate bonds.”
Luis Costa, head of CEEMEA strategy at Citi, indicated on Tuesday that the market move may be an overreaction, telling CNBC there was “absolutely nothing stunning” about the BOJ’s decision.
“You have to take this BOJ measure in the context of a positioning in dollar-yen that was obviously not expecting this tweak. It’s a tweak,” he said.
Japanese inflation is projected to come in at 3.7% annually in November, according to a Reuters poll last week — a 40-year high, but still well below the levels seen in comparable Western economies.
Costa said the Bank of Japan’s move was not geared toward combating inflation but addressing the “infrastructure and the dynamics of JGB trading” and the gap in volatility between the trade in JGBs and the rest of the market.
Dollar strength has been the talk of the currency trading world for most of the year. The U.S. dollar index , which measures the dollar’s value relative to a basket of world currencies, rose to a two-decade high in September. It’s also hit all-time highs against several major currencies in recent weeks, including the British pound . Several market participants now believe the dollar rally, driven by the Federal Reserve raising interest rates more aggressively than other central banks, could fade over the next three to six months. Analysts expect the dollar to decline against 18 out of 38 currencies in the fourth quarter of this year, according to FactSet data. Moreover, they forecast the decline will widen to 10 other currencies for the second quarter of next year. CNBC Pro canvassed opinions from four investment banks and brokers on where they see the dollar heading. UBS UBS considers selling the dollar against G-10 currencies being a “top investment idea for 2023.” The Swiss bank said that it will be less about investment choices and more about portfolio rebalancing that’s likely to cause a sell-off in the dollar. According to the investment bank, years of negative interest rates have led to a sizeable un-hedged buildup of dollars worldwide. For example, the largest Japanese pension fund holds more than $500 billion of dollar assets, with only a small portion hedged, it said. With the dollar index rising to its highest level since 2001, UBS says such investors will begin selling dollars to reduce their risk of future losses. The bank suggests traders can look at USD worst-of put options, derivative contracts that go up in value when the dollar declines, against a basket of currencies such as EUR , JPY and GBP . ING The Dutch multinational bank thinks that while the dollar will strengthen in the near term, the Federal Reserve will likely sound the “all clear” on further rate hikes around March next year. But the Fed pivot alone might not be sufficient for the decline in the dollar, says Chris Turner, global head of markets at ING. “You do need the pull factor of some growth in the Eurozone or China to pull money out of what may be a 5% yielding dollar by that time 2Q23,” he said. Turner does warn that the decline in the dollar might be delayed if inflation proves to be “stickier” than expected and pushes the Fed to raise rates higher. He says when the time is right, and it isn’t now, traders could look at “put spreads, which would not be subject to the time decay.” BCA Research Analysts at BCA Research say from a technical standpoint, the dollar is due for a reversal. Echoing UBS’s view, BCA also suggests “long-term investors should begin to sell the dollar on strength.” The Montreal-based investment research group also said several catalysts could add downward pressure on the dollar, including central banks catching up with the Fed with rate hikes or an uptick in Chinese economic activity , among others. “In our view, we are only halfway through this checklist but nonetheless, conditions are falling into place for a bearish U.S. dollar stance,” said Chester Ntonifor, a foreign exchange strategist at BCA Research, in a note to clients. Goldman Sachs The Wall Street bank remains bullish on the dollar over the next three months and sees certain G-10 currencies only recovering beyond the six-month horizon. However, Goldman favors the Brazilian real , among certain other currencies, over the short term against the dollar following the election of Luiz Inacio Lula da Silva . “Brazil stands out clearly with sustained decreases in inflation, rising real rates, and an FX-supportive macroeconomic backdrop that should continue to drive foreign inflows into Brazilian assets among investors with a global mandate,” said the team led by Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs.
The Japanese yen weakened past 150 against the U.S. dollar Thursday, hitting a key psychological level that hasn’t been seen since August 1990.
The Bank of Japan’s two-day meeting is slated for next week. Policymakers have ruled out a rate hike in order to defend against further weakening of the currency.
On Thursday, Japan’s 10-year government debt yields breached the 0.25% ceiling that the central bank vowed to defend – last standing at 0.252%. The yield on the 20-year bond also rose to its highest since September 2015.
The Bank of Japan also announced emergency bond-buying operations Thursday. It offered to buy 100 billion yen ($666.98 million) worth of Japanese government bonds with maturities of 10-20 years and another tranche worth 100 billion yen with maturities of 5-10 years.
The central bank has repeatedly vowed to buy an unlimited amount of bonds at a fixed rate in order to cap 10-year government debt yields at 0.25% as part of its stimulus measures for the economy.
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On Thursday, Reuters reported Japanese Finance Minister Shunichi Suzuki said the government will take “appropriate steps against excess volatility.”
“Recent rapid and one-sided yen declines are undesirable. We absolutely cannot tolerate excessively volatile moves driven by speculative trading,” he said.
When asked how concerning is USD/JPY reaching levels around 150, ANZ chief economist Richard Yetsenga said he’s “not that worried.”
“I don’t think we’re into destabilizing currency territory yet,” he said on CNBC’s “Squawk Box Asia.”
“There’s lots of emotive words around it, but what problems has it engendered?” he said.
Shortly after the Bank of Japan’s latest decision to maintain low interest rates to support the country’s sluggish economy last month, officials confirmed they intervened to support the currency against further weakening.
That intervention briefly pushed the yen to 142 against the dollar. The spread between the highest and lowest points intraday was also at its widest since 2016.
In April 1990, the yen traded around 159.8 against the dollar and last breached 160 in December 1986.
