- Macro Strategist
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
The Bank of Japan (BoJ) has underpinned global liquidity for decades through monetary policy decisions aimed at generating inflation in a country seemingly unable to do so since the early 90s. Notably, in 2016, it started its ultra-accommodative policy of “yield curve control” (YCC), which commits it to defending a preset yield ceiling level. However, since late 2022, this policy has become increasingly challenged by rising domestic inflation and political pressure, with BoJ Governor Haruhiko Kuroda’s leadership finding it difficult to stem the pressure for higher rates.
The BoJ continues to defy market expectations. It stunned the market in December with its decision to widen the target yield band for the reference 10-year Japanese government bond (JGB) from +0.25% to +0.5%. And it surprised markets again when it maintained the current band at its January monetary policy meeting.
What this means is that the BoJ is prepared to let its balance sheet expand between now and its next meeting on March 10, and potentially beyond.
In effect, the contraction in global liquidity has stopped, and even reversed, as the BoJ’s bond purchases dwarf the US Federal Reserve’s (Fed’s) quantitative tightening (QT) measures. Because the BoJ has been forced to buy assets aggressively to defend the new 10-year YCC band, Global QE is rising at its fastest pace since mid-2021. This accelerating central bank liquidity partly explains the fall in bond yields and the bounce in risk assets we have seen so far this year.
The main characters are changing — Japan has a relatively new prime minister and the current BoJ governor is due to retire on April 8. Neither Prime Minister Fumio Kishida or the yet-to-be-nominated new governor will be tied to the “inflation at all costs” strategy set out by former PM Shinzo Abe and Governor Kuroda. Forward guidance has become irrelevant as markets are no longer confident in the BoJ’s reaction function.
Macroeconomic conditions suggest change is needed — The BoJ is defending a yield that looks increasingly inappropriate for the cyclical outlook and, hence, is unsustainable. Its unexpected shift at the December meeting implied unease at the BoJ about expanding its balance sheet while exiting ultra-loose policy. Meanwhile, the outcome of the January meeting suggests that the bank is still not fully convinced that inflation is now sustainable.
The cost of bond buying looks unsustainable — Core inflation is running at a 40-year high and 2023 may see the Japanese economy record its second-strongest year of nominal growth since 1991. This leaves the BoJ in the wrong place, defending an increasingly problematic yield peg at a spiralling cost. It has cited an unrealised loss potentially as high as JPY 28 trillion (equivalent to 5.2% of GDP) as a consequence of buying up bonds to curb the 1% parallel move in the JGB curve that occurred in early December 2022, while the amount spent trying to defend the 0.5% 10-year yield target peg may have exceeded JPY 17 trillion to date. Moreover, the BoJ currently owns 50% of outstanding JGBs and its holdings are likely to reach 60% by mid-year at the current pace of purchases.
The BoJ is trying to manage a tension that requires a gradual adjustment out of an inappropriate policy without risking financial instability. At times, it will be in the uncomfortable position of having to aggressively accelerate its balance-sheet expansion to smooth its exit and, hence, add more global liquidity. The stronger the cycle and the higher the level of inflation, the more the bank will be forced to expand its balance sheet to defend an inappropriate level of yields. As a result, the impact on global duration and the USDJPY exchange rate becomes more cross-directional and nuanced, and certainly not as linear as in 2022, because there will be periods of aggressive BoJ buying into the exit from ultra-accommodative policy.
You snooze, you may lose: The case for bondsContinue reading
The great central bank balancing actContinue reading
Fed not yet willing to declare victory on inflationContinue reading
US regional banking sector updateContinue reading
Financials amid rising dispersionContinue reading
You snooze, you may lose: The case for bonds
There are signs the Federal Reserve's rate-hiking cycle may be nearing an end, but some uncertainty remains. With that in mind, Multi-Asset Strategist Nanette Abuhoff Jacobson considers the timing of a move from cash to bonds.
The great central bank balancing act
Marco Giordano examines the difficult balancing act that central banks around the world are seeking to perform and its likely implications for investors.
Fed not yet willing to declare victory on inflation
We think the Fed is done raising rates for this cycle, despite the likelihood that they are being overly optimistic about inflation. Read to find out why.
US regional banking sector update
We explore how banking regulation and legislation could impact US regional banks, including highlighting the potential for M&A activity and for dispersion to drive long/short opportunities.
Financials amid rising dispersion
We explore why we believe dispersion across stocks, sectors, and geographies is supporting numerous secular themes in long/short investing in financials.
After the US downgrade: Thoughts on public debt, bond yields, and Fed policy
In the wake of the US debt downgrade by Fitch, Macro Strategist Juhi Dhawan explains what worries her most about the nation's debt situation and considers the impact on the term premium and the Fed’s plans.
Why cash won’t cut it for long: The case for bonds
Global Investment and Multi-Asset Strategist Nanette Abuhoff Jacobson and Investment Strategy Analyst Patrick Wattiau explore the relative potential benefits of bonds versus cash.
How to interpret the Bank of Japan’s latest policy shift
We analyse the wide-ranging investment implications of the Bank of Japan's latest policy shift.
Chair Powell maintains optionality
Fixed Income Analyst Caroline Casavant shares what she thinks matters most for investors in light of the latest interest-rate hike from the Fed.
Fed skips along the path to a pause
Jeremy Forster analyzes the Federal Reserve's decision to pause its interest-rate hiking cycle, explains why he believes it could be an extended pause, and shares the potential implications for fixed income markets.
Europe/US divergence: the ECB has further to go
How far will Europe diverge from the US? Macro Strategist Eoin O’Callaghan sees several reasons sustaining this growing divergence.