CHANGE: Japan’s slow-moving but potentially momentous monetary policy pivot took another step forward. With the naming of academic Kazuo Ueda as replacement for long-standing Bank of Japan (BoJ) Governor Kuroda. Ueda is to take over April 8th for a five-year term. A more hawkish BoJ tone and further increase in bond yield curve control (YCC) ceiling is likely coming. Before a hike of -0.1% policy interest rate in 2024. The potential impacts are large, and global. It could boost the Yen more, with it still the world’s cheapest big currency. It could be a headwind to local exporters, and benefit to banks. But may also tighten global liquidity more and raise US and European bond yields as policy divergence narrows and Japan’ capital outflows reverse.
IMPACT: BoJ bond purchases to keep local yields low has offset the Fed’ quantitative tightening (QT) and boosted global liquidity. Japan is also the largest foreign holder of US government bonds, at $1.1 trillion, and a proportionately larger owner of Europe’s bonds. Higher interest rates could help local banks, like Sumitomo (SMFG) or Mitsubishi UFG (MUFG). But a stronger Yen could hurt those globally-focused, like SONY (SONY), with 72% sales abroad, or Nintendo (NTDOY) at 79%. The traditional Nikkei/yen negative correlation is down but not out (see chart).
POLICY: Headline inflation is already at 4%, wages rising near 5%, and Japan is set to be one of the few economies to post faster growth this year. But policy gradualism will remain. With its long deflation history and world leading 250% debt/GDP and with a quarter budget on interest payments. Investors are agitating for more, testing the new 0.5% 10-year bond yield ceiling, and the authorities increasingly aware of the policy costs, as they crowd-out the local bond market.
All data, figures & charts are valid as of 15/02/2023