Editor丨Zhongding Holding Group.
Summary:
The Bank of Japan's final meeting of 2023 is closely watched, with the market looking for clues as to when and how monetary policy will pivot. The Bank of Japan (BOJ) announced the easing of yield curve control (YCC) more than expected at the end of last year, with the target yield from 025 to 05. In July this year, it expanded the YCC volatility range again and announced the expansion of the target range for the 10-year Japanese government bond yield, so that it was 0Floating within 5%-1%, the BOJ's several slow but well-directed operations have gradually ignited market expectations for the normalization of Japan's monetary policy.
On December 19, the Bank of Japan's year-end monetary policy meeting was held, maintaining the short-term policy rate at -01% unchanged, keeping the asset purchase program unchanged, maintaining forward-looking guidance unchanged, guiding the 10Y JGB yield to remain around 0%, continuing to move 10% is used as a reference for the operation of the 10Y JGB interest rate cap. Contrary to expectations, unlike the strong expectations of the market, Ueda's statement at this BOJ meeting is significantly more **.
So, how to judge how the Bank of Japan will change the negative interest rate policy in the next step, and the impact on the global capital market?
In our view, the core of the BOJ's monetary policy normalization next year will depend on changes in headline inflation and labor wages, while when the U.S. economy will "land" and the Fed's interest rate cut expectations may also be factors affecting its decision-making.
For the market, once the Bank of Japan turns, the first to bear the brunt of the yen, its trend appreciation of the basis and space are extremely sufficient, and the magnitude and pace of the rise in Japanese bond interest rates may depend on the progress of the US and European central banks to cut interest rates next year. Once the yen raises interest rates and negative interest rates cease, the global carry trade will inevitably reverse, and the potential consequences will be difficult to estimate.
1. At the end of the year, the market is highly concerned about the actions of the Bank of Japan
Bank of Japan Governor Kazuo Ueda said on December 7 that "it will become more difficult to deal with monetary policy from the end of the year to next year, and there are various options for adjusting policy rates if interest rates are raised." As a result, the market is highly concerned about the Bank of Japan's 2023 year-end meeting, and the expectation that the Bank of Japan will turn around again at this meeting has risen, and even interpreted Ueda's words as possible consideration of canceling the negative interest rate policy in the near future, resulting in the simultaneous rise of the Japanese bond interest rate and the yen exchange rate from the beginning of this month until the Bank of Japan meeting. From December 7 to 15, the yield on 10-year Japanese bonds rose by 6bp, and the USD/JPY rose from 1473 walks down to 1422. The yen appreciated slightly.
2. However, the negative interest rate policy was not canceled at this meeting, and market expectations were disappointed
Negative interest rates are the basis that led to the yen becoming an internationally recognized carry currency, and once removed, could mean a complete reversal of the carry trade, despite the Bank of Japan's short-term policy rate of -01%, but a negative value of 10 bps has constituted a global carry trade dominated by economies of scale.
At this meeting, Ueda mainly talked about three issues:First, keeping negative interest rates and yield curve control (YCC) unchanged;SecondJapan's core CPI excluding fresh food is still above 2% year-on-year, and inflation is expected to be higher than 2% in fiscal 2024, and potential inflation may gradually return to the target levelThird, refusing to talk about a monetary policy pivot and not giving the market any hint about the prospect of a rate hike.
In our view, the core of the BOJ's monetary policy normalization next year will depend on changes in headline inflation and labor wages, while when the U.S. economy will "land" and the Fed's interest rate cut expectations may also be factors affecting its decision-making.
First and foremost is the salary of residents。This year, Japan's "spring fight" negotiated salary hit the largest increase of 3 in 30 years58%, boosted by wage growth, "super-core inflation" excluding food and energy has also begun to rise, and the vitality of the service sector has begun to recover. The 2024 "Spring Fight" negotiations in Japan will be particularly critical, and if Japan's real wage income (Japanese labor cash income - CPI) rises more than expected, then the pace of the BOJ's exit from loose monetary policy may accelerate accordingly.
The second is overall inflation。In October 2023, Japan's core CPI, which excludes fresh food, increased by 29%, which has been above the target level of 2% for 19 consecutive months, and has also exceeded the inflation rate in Europe and the United States over the same period. Even if in the general direction, global inflation may fall further in 2024, the tone change in micro-business and household behavior brought about by inflation resilience in the short term, as well as the pressure on Kishida**'s support rating, cannot be underestimated.
Third, the trend of the US economy next year. Distinguish between different types of "landings" for the U.S. economy: if it is a "soft landing", the Fed is likely to adopt a moderate interest rate cut to ease market sentiment and bring a more favorable environment for the Bank of Japan to raise interest ratesIf it is a "hard landing", even if the Fed cuts interest rates in time, it may also cause deterioration of global liquidity conditions and rising risk aversion, and the BOJ may face greater headwinds in its pivotIf the "non-landing" continues, the Fed's interest rate cut expectations may be further delayed, which is also a headwind to the BOJ's pivot.
At present, the mainstream expectation in the global market is that the Bank of Japan may exit negative interest rates in the second quarter of next year, and raise interest rates first and then exit YCC, mainly to defend its ability to control Japanese bond interest rates and prevent the risk of a sudden tightening of liquidity after negative interest rates turn positive.
3. Once the Bank of Japan turns, how will the assets change?
Considering that the Bank of Japan has never raised interest rates in the past 17 years, once the 10bp is raised, it may have a big shock to the Japanese economy, the yen, and Japanese bonds.
For Japanese bonds, there is more certainty that the trend of Japanese bond interest rates will rise, but the magnitude and pace may be slightly lower than expected. The BOJ's exit from negative interest rates, the abandonment of YCC, and the potential for further interest rate hikes will all bring upward momentum to JGB rates. Looking back at December 2022 and July 2023, the Bank of Japan raised the YCC target range twice, and the Japanese bond interest rate gave a quick and well-directed response. However, considering that the Fed's interest rate cut cycle will gradually open in the second half of next year, if it is a rate cut in the case of a "soft landing", the global liquidity pressure and risk aversion will be marginally eased, which may hedge the pressure on the rise in Japanese bond rates.
In contrast, there is more room for the yen to appreciate on a trend. As of the end of November 2023, the USDJPY briefly rose above the 150 mark, and the yen is now at its weakest level in 40 years. In the second half of 2024, if the monetary policy difference between Japan and Europe and the United States is tightened, there is a possibility that the yen exchange rate will appreciate significantly. At the end of 2022, the BOJ's correction to the YCC caused the yen exchange rate to rise above 130 for a while, which has proved to the market that there is a lot of room for the yen to be the best in the future.
Even more confusing is the next step in the global arbitrage trade. In the global arbitrage market, the arbitrage trading model of "lending low-interest currencies - borrowing high-interest currencies - buying high-interest bonds and deposits - earning interest rate differentials" prevails, supplemented by leveraged operations, and traders make a lot of money. Since the 90s of the last century, the Bank of Japan has maintained a low interest rate, and the yen has become recognized as cheap money in the global market and a key hub for liquidity supply. An important foundation behind the perennial continuation of the yen-led cross-border arbitrage trading model is the need for Japan to maintain a sustained low interest rate environment so that arbitrage funds can control costs. Once the "cheap money" is no longer cheap and the interest rate differential can no longer cover the transaction costs, then hundreds of millions of arbitrage capital will be lost.
As soon as Japan raises interest rates, those funds in the form of U.S. stocks and U.S. bonds will inevitably be withdrawn, will this be a sign of the beginning of the next round of financial crisis?You know, in the past 30 years, it seems that every time the Bank of Japan raises interest rates and the yen appreciates, it will trigger a round of financial debt crisis. In 1990, the Bank of Japan began to raise interest rates on several topics, punctured the domestic ** and real estate bubbles, and superimposed the follow-up monetary and fiscal policies "as we go", and Japan fell into a "lost decade". In August 2000, the Bank of Japan raised interest rates, and the U.S. Internet bubble completely burst, and the Nasdaq was nearly 60% in 7 months. In 2006, the Bank of Japan raised interest rates twice, and the U.S. housing prices were at a clear turning point, and the S&P Shiller housing price index of 10 large and medium-sized cities opened a two-year, nearly 50% cycle.
The global carry trade reversal could be the next "thunder" that will be ignored by the market next year.