BOJ Relaxes Grip On Rates, Should We Brace Ourselves For The Yen's Soar?

The Bank of Japan, which has always been a maverick, once again adjusted the Yield Curve Control (YCC) policy, further liberalized the original long-term interest rate ceiling, and set 1% as the reference line, which means that the Bank of Japan's loose monetary policy may have an inflection point.

Japan's outstanding economic development momentum is slowing down, and the drag of high inflation on household consumption and real estate is becoming more and more obvious, while the contribution of net exports is facing uncertainty with the slowdown of global economic growth.

At present, the Bank of Japan is faced with a dilemma between stabilizing interest rates and protecting exchange rates. With the increase of the possibility of slowing down the US economy in the fourth quarter and the adjustment of Japan's monetary policy, the depreciation of the yen exchange rate may come to an end.

Japan's monetary policy faces a dilemma

From the perspective of economic growth, the kinetic energy of Japan's strong economic growth has weakened. First of all, under high inflation, the contribution of Japanese private sector consumption to GDP is negative, and the contribution rate to GDP in the second quarter of 2023 is-0.2%. Although Japan's unemployment rate is at its lowest level since the bursting of the real estate bubble, it was only 2.6% in September, but the growth of Japanese residents' income is gradually slowing down.

Secondly, Japan's real estate performance was weak in the third quarter, which was unfavorable to Japan's economic growth driven by residential investment in the first half of the year. In September, the number of new housing starts in Japan decreased by 6.8% year-on-year, which is the fourth consecutive month of negative growth since June.

Thirdly, the contribution of net exports to Japan's economy in the fourth quarter is uncertain. Looking back at the second quarter, net exports boosted Japan's GDP at an annual rate of 2.7 percentage points. The year-on-year growth rate of Japan's exports in September turned from negative to positive, rising to 4.2%, but far lower than the 27.3% in the same period last year.

It is worth noting that Japan's semiconductor exports no longer have competitive advantages. Canada Technology Insight Company compared the annual sales rankings of semiconductor manufacturers in 2022 and 2010. The top 15 companies can no longer see four Japanese companies such as Toshiba, Renesas Electronics, Elpida Memory and Sony, which means that Japan has been kicked out of the ranks of semiconductor powers.

Japan's large enterprises have not been able to get rid of the integrated business model from design to manufacturing. Due to the slow restructuring process, it is unable to cope with huge investment and gradually loses competitiveness.

Bank of Japan Relaxes Yields

Under the background of weakening economic growth momentum in Japan, it is necessary for the Bank of Japan not to liberalize the interest rate restriction policy too quickly, that is, the yield curve control cannot be cancelled immediately, and it needs gradual adjustment and the cooperation of fiscal policy.

Although inflation in Japan has cooled, household consumption is still weak due to high inflation and slowing growth of disposable income. Therefore, the Bank of Japan faces a dilemma, which is to keep interest rates low to stimulate the economy and wage inflation, and to maintain a stable exchange rate; It also prevents imported inflation from eroding domestic purchasing power and slowing down domestic recovery.

US dollar interest rate and exchange rate may usher in an inflection point

In terms of US dollar interest rate, since the beginning of October, the 10-year yield of US BONDS has risen rapidly, reaching a new high since 2007. Among them, the yield of 2-year US bonds sensitive to monetary policy once rose to 5.19% on October 18th, while the yield of 10-year and 30-year US bonds reflecting the economic growth prospects of the United States once hit the annual records of 4.98% and 5.11%.

However, we find that this round of upward US bond yields is not driven by rate hike expectations, but more by the imbalance between supply and demand of US bonds and the term premium.

In the fourth quarter, the imbalance between supply and demand of US bonds will appear to a certain extent. On October 30th, the U.S. Treasury Department announced that in the fourth quarter of this year from October to December, the estimated federal government borrowing scale was $776 billion, down $760 from the expected $8,520 at the end of July.

In addition, since next year is the election year of the United States, it is very difficult for the two parties in Congress to reach an agreement on fiscal expenditure, so the scale of US debt issuance will gradually decrease in the future. With the reduction of issuance scale, the term premium of US debt will also decrease.

From the perspective of exchange rate, the US economy will probably slow down in the fourth quarter, due to the lack of fiscal expansion to hedge against credit contraction. The US dollar credit index constructed by us shows that the contraction of US dollar credit is very obvious in financial markets.

To sum up, the Bank of Japan is faced with the dilemma of stabilizing interest rates and protecting exchange rates, but the Bank of Japan has relaxed the upper limit of interest rates controlled by the yield curve, which means that Japan's loose monetary policy is welcoming an inflection point.

However, the US economy has a high probability of slowing down in the fourth quarter, the US dollar interest rate and exchange rate will usher in an inflection point, and the depreciation of the Japanese yen is coming to an end.

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  • Verdave
    ·2023-11-02

    Great ariticle, would you like to share it?

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  • tigermeow
    ·2023-11-02
    Great perspective here
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