Bank of Japan (BoJ) led by Haruhiko Kuroda freezes markets around the world, bringing back to mind investors and traders the Christmas shock of 1989, when it unexpectedly raised Japan’s key interest rates by 25 basis points to 4.5% on Christmas Day.
Reason for the shock ‘delivered’ today, Tuesday 20 December 2022, more than 30 years later: the growth of inflation it’s starting to scare even here, a country known mostly for the persistence of deflation.
In fact, in what was its last act of 2022, the BoJ, white fly among the main central banks in the world for the ultra-expansionary monetary policy that it continues to pursue – based on negative rates and unbridled QE – announced that it has left the cost of money unchanged at -0.1% but that it has also made a change to the YCC (Yield Curve Control), or the yield curve control tool.
What do you mean?
The Bank of Japan has increased the fluctuation range of Japanese government bond rates, from the previous range of between -0.25% and 0.25% to the new band, between -0.5% and +0.5%.
Bank of Japan shocks markets with YCC adjustment
At first glance, the BoJ’s move is hawkish:
the change announced to the YCC corresponds in fact to a restrictive monetary policy maneuver given that, in this way, the central bank of Japan will allow long-term rates to rise from 25 basis points (the previous limit set with the YCC policy) to 50 basis points, the limit announced today.
However, the news doesn’t end there.
If raising the range cap to 50 basis points is a hawkish move, it definitely isn’t. the announcement relating to QE-Quantitative easing (which in Japan continues to persist, compared to a Quantitative Tightening which, after Jerome Powell’s Fed, will also be launched shortly by the ECB), or the announcement to increase purchases of government bonds made in Japan up to 9 trillion yen a monthin the period between January and March 2023.
The latter is a distinctly dovish move, which also comes at a time when we are learning that, for the first time ever, the market value of parked sovereign debt in the Bank of Japan portfolio exceeded the 50% threshold of outstanding government bonds.
The news was spread with a report released yesterday by the BoJwhich showed that the central bank held 535.62 trillion yen (the equivalent of $3.92 trillion) worth of Japanese government bonds at the end of September, 50.3% of outstanding bondsvalued throughout 1.04 quadrillion yen: the stake held by the Bank of Japan increased from 49.6% at the end of June.
In this regard, it is worth mentioning that the Bank of Japan ended up being defined even la meme stock in stile GameStop: perhaps not everyone knows that the BoJ is listed on the Stock Exchange.
That said, it is not the further strengthened QE bazooka that global financial markets are eyeing.
Tokyo Stock Exchange shocked by series of central bank announcements, with the Nikkei 225 index which closed down 2.5%.
I Japan government bond rates with a 10-year maturity jumped to 0.46%, the highest value since 2015.
Lo yen immediately jumped nearly 3% to JPY 133 nand comparisons of the US dollar, accelerating the recovery of the last few days from the minimum values of the last 32 years. Recovery which had been supported by the decision of the Federal Reserve di Jerome Powell and of ECB by Christine Lagarde to reduce the intensity of the monetary tightening from the maxi-rises of 75 basis points to +50 points (moves which, however, as also seen by the market reaction, do not imply any dovish turn of the institutions).
Interviewed by the Financial Times, Mansoor Mohi-uddin, chief economist of the Bank of Singapore, expressly drew the parallelism between what was announced today by Kuroda & Co. and that Christmas shock of 1989, recalling that “the BoJ’s decision to raise interest rates in December 1989 caused a major change in Japanese markets”.
According to Mohi-uddin, that very memory “amplifies the meaning of the signal sent to the markets today”, which could hint at the central bank’s intention to start considering the exit from the yield curve control (YCC) policy.
Kuroda and the comparison with the 1989 BoJ move
Interviewed by Bloomberg Martin Whetton, head of the fixed income and forex strategy division at Commonwealth Bank of Australia, made the same comparison with that Christmas more than 30 years ago:
“It was in this same period, 33 years ago when, not happy with the dollar-yen exchange rate, the BoJ raised rates by 25 basis points, to 4.5%, on Christmas day“, Whetton pointed out.
For its part, noting the deterioration in the functioning of the bond market, the Bank of Japan in Kuroda announced in fact that it expects the review of the YCC “will enhance the sustainability of accommodative monetary policy”.
From the sentence it emerges how Kuroda does not want to appear suddenly more hawkish, in view of his farewell from the position of governor of the central bank, in April 2023.
The general view to date is that it would have been inappropriate for the Bank of Japan to change its monetary policy stance at a time when Russia’s invasion of Ukraine adds further downside risks to Japan’s economy.
But it is also true that the yen’s plunge this year it triggered the alert several times among Bank of Japan officials themselves, who could no longer be ignored.
The collapse of the yen has been worrying for a long time, also because Japan is an importer of raw materials, and the surge in commodity prices triggered by the war in Ukraine has put Japanese companies in difficulty, as they grapple with rising costs.
Japan’s core inflation also exceeded the Bank of Japan’s 2% target for seven consecutive months, rising to a 40-year record of 3.6% in October. This, while several analysts have warned for some time that the BoJ’s commitment to defending the YCC targets has contributed to significantly reducing market liquidity, causing – writes the Financial Times – a “dysfunction” in the Japanese government bond market.
But the last dovish samurai try to dull the hawkish sword
A signal, therefore, to companies and to forex, Haruhiko Kuroda has decided to launch it. But the name Japan rhymes more with deflation than with inflation.
So much so that Kuroda, also known as the last last samurai dovish today he repeated the mantra “We will not hesitate to further ease monetary policy if needed,” emphasizing that he believes that the growth ofinflation will subside in the second half of 2023 and that it will take time to sustainably reach the inflation target.
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It must be remembered that the Bank of Japan launched the negative rate policy in 2016, in order to fight stubborn deflation. Rates were set at -0.1%. And they have remained that way ever since.
But today something has changed.