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A day after the Bank of Japan’s bombshell and things are looking a little steadier. Most Asian share markets and U.S. stock futures are up, and the Nikkei down only modestly.
Yet the yen has only given back a sliver of yesterday’s huge gains and Treasury yields have nudged higher again as markets clearly think the writing is on the wall for Japan’s uber-easy policies, even if the BOJ insists otherwise.
Analysts assume a formal shift will come after Japan’s Spring wage talks and BOJ chief Kuroda’s retirement in April. Higher yields at home could make it more attractive for Japanese investors to repatriate some funds, particularly as hedging costs have been rising for offshore assets.
Removing the Japanese yield anchor would be painful timing for bond markets globally given many major central banks will be unwinding their QE holdings next year.
Analysts also suspect the BOJ shift meant the days of Japan desiring, or just accepting, a lower yen were over and the fallout in carry trades has been vicious.
Both the Aussie and kiwi fell 4% on the yen on Tuesday, even as Australian 10-year yields surged 23 basis points to maintain their premium over Japanese debt.
Other carry trades at risk include the Brazilian real, South African rand and Mexican peso, and exiting from those illiquid currencies will likely include a leg of selling the U.S. dollar for the yen.
On a side note, it was interesting that the BOJ put so much emphasis on maintaining the proper functioning of the bond market in its shock decision. Ever since the September meltdown in gilts, central bankers have sounded worried it could be repeated elsewhere.
It was notable that minutes of the Fed’s November meeting showed the FOMC spent some time discussing the importance of an orderly Treasury market and the risk of possible disruptions as they tightened policy. Maybe this was one reason Fed Chair Powell’s pushback against the November rally in Treasuries was not quite as full-throated as many had expected.
It leaves a sense of something going on behind the scenes, something urgent. Otherwise, why chose to drop this bombshell the week before Christmas.
Key developments that could influence markets on Wednesday:
– Canada’s November CPI, where a downside surprise could bring the BOC closer to pausing its rate hikes.
– U.S. Conference Board version of consumer confidence and Germany’s GfK consumer survey.
– Ukrainian President Volodymyr Zelenskiy is expected to travel to Washington to meet President Joe Biden and visit Congress, which would be worth a cheer.
