Japanese Surprise
December 20, 2022
At the last scheduled Bank of Japan policy review in 2022 and with Governor Kuroda’s decade-long tenure approaching its April 2023 end, the Board decided to double the allowable daily trading corridor of the 10-year JGB yield from +/-0.25 to plus or minus 0.50 percentage points around a central target of “around zero percent.” The BOJ has been the most notable holdout from monetary tightening around the world, and Governor Kuroda went to great extent denying that the move constituted a rate hike or a first step toward exiting the policy known as quantitative and qualitative monetary easing with yield curve control. BOJ officials project that it will take quite some time longer before the goal of sustained 2% core inflation is realized and project that inflation will be falling again in the second half of next fiscal year. Today’s action was projected as a technical policy tweak to correct distortions in the yield curve and is intended to enhance the transmission of central bank policy to the financial system. The short-term policy rate was kept at -0.10%, and a planned increase of monthly central bank purchases of Japanese government bonds nine trillion yen was unveiled to underscore an unwavering commitment to ultra-easy monetary policy for as long as it takes.
Markets were hearing none of this effort to downplay what they perceive to be a huge and very unexpected change by the BOJ.
- The ten-year JGB yield climbed as high as 0.46% and closed 15 basis point higher today. Other ten-year sovereign debt yields have risen by 11 basis points in the U.K., 10 bps in Spain, 9 bps in France and Italy, and 8 basis points in the United States and Germany.
- The Nikkei-225 Japanese stock market index closed 2.5% lower and dragged share prices elsewhere in the Pacific Rim down by 1.5% in Australia, 1.3% in Taiwan and Hong Kong, 1.1% in China, 1.0% in New Zealand, and 0.8% in South Korea.
- The yen soared 4% against the dollar and was primarily responsible for a 0.9% drop in the DXY weighted dollar index. The dollar is also down by 0.5% against the euro, Swiss franc and Canadian dollar and by 0.4% versus the Mexican peso and 0.3% relative to the Chinese yuan.
- Commodity prices were supercharged by the BOJ’s surprise, with gains today so far of 3.4% in Bitcoin, 1.7% in gold, and 1.0% in WTI oil.
Several economies released indices of consumer confidence. The preliminary estimate of consumer sentiment in the euro area rose to a 7-month high but at -22.1 remains well south of the minus 6.8 reading at end-2021. Danish and Belgian consumer confidence improved to 4-month highs, while Dutch consumer sentiment rose to a 3-month high. In Contrast, Turkish consumer confidence weakened to a 3-month low.
German producer prices tumbled month-on-month for a second straight time in November, dropping 3.9% after a 4.2% decline in October. Year-on-year PPI inflation of 28.2% was down from a record 45.8% in August and September, primarily because of energy price disinflation. Excluding that item, the PPI’s 12-month increase fell from 14.0% in August-September to 12.7% last month.
Polish PPI inflation slowed to a 9-month low of 20.8%. Portuguese producer price inflation of 14.1% marked a 14-month low and was down last month from 25.5% at mid-2022.
Consumer price inflation in Hong Kong of 1.8% last month matched October’s figure, which had been the lowest in four months, but Senagalese CPI inflation of 14.1% was the most in at least 16 years.
Euroland experienced a EUR 4.39 billion current account deficit in October, reversing from surpluses of EUR 3.8 billion in September and EUR 6.5 billion in October 2021. A surplus if EUR 318 billion in the 12 months through October 2022 (and equal to 2.6% of GDP) transitioned to a deficit equal to 0.5% of GDP in the ensuing 12-month period.
Energy disruptions and weakening global demand have hurt Switzerland’s external accounts, too. The Swiss trade surplus in November of just CHF 494 million was down from CHF 4.1 billion a year earlier and the smallest surplus in 58 months.
U.S. building permits are reeling. Such fell 11.2% on month in November to a 29-month low and were 22.4% below their year-earlier level. Housing starts slid only 0.5% on month but showed the smallest on-year increase (4.6%) in 21 months.
Canadian retail sales continued to toggle between gains and drops, falling 2.3% in July, 0.6% in September and by a projected 0.5% last month but rising 0.4% in August and 1.4% in October.
In other central banking news, China’s 1-year and 5-year loan prime facility rates were again left unchanged at 3.65% and 4.30% after December review. But officials at the National Bank of Morocco authorized their second policy interest rate hike of a half percentage point since September. The new rate level of 2.5% is at an 82-month high but remains well below CPI inflation of 8%. The key interest rate had been 1.5% from mid-2020 until the initial increase three months ago.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Japan, Euroland consumer confidence and current account, German PPI, U.S. housing starts and building permits