In December The Bank of Japan Surprised Markets with a Policy Tweak; Failure to Tweak Further This Month Also Caught Investors by Surprise
January 18, 2023
Investors had assumed that last month’s doubling of the daily cap on the 10-year Japanese government bond yield to 0.50% was not, as then claimed, a mere technical tweak of the policy of yield curve control meant to enhance market functionality but rather an initial start to exiting the policy altogether. This month’s BOJ policy message emphatically discourages such speculation, reverts to a dovish tone, promises to take additional measures and means to keep policy rates at present or lower levels, and attests that prospects for future inflation being sustainable at the 2% target have not yet emerged.
The yen sank 0.7% against the dollar and by an even greater extent against several other major currencies, while Japan’s stock market jumped 2.5% in conjunction with a commensurate nine-basis point retreat of the JGB yield to 0.40%.
By comparison,
- Other key stock markets made only muted changes this Wednesday.
- The dollar fell 0.8% against the Swiss franc and sterling, 0.6% versus the Australian dollar, and 0.4% relative to the euro.
- Ten-year sovereign debt yields are down by 8, 7, 6, 5, and 2 basis points in the United States, Italy, France, Germany and Great Britain.
- Among commodities and crypto, West Texas Intermediate oil climbed 2.0%, gold rose 0.5%, and Bitcoin gained 0.6% to its best level since September.
The Bank of Japan’s negative 0.10% short-term and 10-year JGB yield target of around zero percent were not modified. The 0.50% daily ceiling on 10-year JGB’s will be enforced more vigorously with asset purchases and other expanded operative techniques unveiled because bank officials are still dissatisfied that December’s move has thus far not improved market functionality to the degree intended. The interest rate decisions were made unanimously, and the policy review coincided with publication of an updated quarterly Outlook for Economic Activity and Prices. In such projected GDP growth in the coming fiscal 2023 that begins in April was revised downward to 1.7% from 1.9% assumed in the prior Outlook released in October and 2.0% that had been assumed in the July 2022 report. Core CPI inflation that is currently well above the 2.0% target is expected to drop to 2.0% by the middle of fiscal year (i.e., around September) and to average 1.6% for all of FY2023 and rise only to 1.8% in the following fiscal year. Growth in wages will be highly influential in guiding further policy. Officials continue to attach great uncertainty to their forecasts. With Governor Kuroda retiring in April, it’s fair to say that the central bank’s policy outlook likewise faces considerable uncertainty, since the policy framework has been inseparable from his personal stewardship.
Although Bank of Japan officials put a positive spin on the Japanese economy, contrasting its pickup with slower growth experienced in many other economies lately, Japanese data reported today were not robust.
- Industrial production in November rose just 0.2% on month and 0.9% below year-earlier levels.
- Capacity utilization dropped 1.4% on month and 0.6% on year in November, while capacity stagnated for a second straight month and also recorded a 0.6% year-on-year decline.
- Orders for machinery in November from the domestic core private sector, the government, and foreigners respectively tumbled 8.3%, 6.8%, and 2.0% and depict a fourth quarter picture that is likely to be softer than what officials were predicting previously.
British CPI inflation eased to a very inconsequential degree last month. Consumer prices rose 0.4% on month, the the 12-month rate of increase at 10.5% was in double digits for a fourth consecutive time and not far beneath October’s 41-year high of 11.1%. In December 2021 CPI inflation had been 5.4%, and core inflation last month of 6.3% was unchanged from November’s reading.
Revised CPI data for the euro area continued to put the 12-month rate of price increase at 9.2%, which is down from the record 10.6% in October. Energy drove this improvement, but a worrisome element of the figures was that core consumer price inflation excluding food and energy actually rose to a fresh high of 5.2% from 5.0% in both October and November. Service sector price inflation at 4.4% also accelerated by 0.2 percentage points.
South African CPI inflation settled back to 7-month low of 7.2% in December but still exceeded the year-earlier pace of 5.9%.
Construction output in Euroland fell 0.8% in November, nearly reversing October’s 1.0% increase.
Stimulated by the lowest 30-year fixed mortgage rate since September that was seen last week, U.S. mortgage applications soared 27.9%, more than reversing the cumulative decline in the prior two week.
The National Bank of Belarus’ policy interest rate has been cut by 50 basis points to 11.5%. That was the first reduction since a 25-basis point cut in June 2020 to 7.75%. The rate prior to the pandemic had been at 9.0%. In early 2021, officials implemented a pair of 75-basis point hikes to 9.25%, and at the outset of the Ukraine war the rate was raised sharply to 12.0%, where its been since February 2022. Belarus is a close ally of Putin, and Russia has taken steps to encourage a downtrend in Belarusian CPI inflation, which dropped five percentage points to 12.8% over the last five months of 2022.
The Federal Reserve Beige Book of regional economic conditions will be released this afternoon.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Japan, British consumer prices, National Bank of Belarus
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