A look at the day ahead in Asian markets from Jamie McGeever.
In many ways, the Bank of Japan’s bolt from the blue on Tuesday was the perfect bookend to what has been one of the most tumultuous years ever for financial markets.
The BOJ’s effective policy tightening impact on Japanese assets was instant and sizeable – the Nikkei slumped 2.5%, the yen had its best day in years and the 10-year JGB yield posted its biggest rise in almost two decades.
Graphic: JGB 10-year yield – daily change (bps) –
The effect on global markets, however, may be more of a slow burner.
Although the MSCI Asia ex-Japan index fell and yields on U.S. Treasuries and other government bonds rose on Tuesday, the MSCI World index and Wall Street eked out gains and non-yen major exchange rates were remarkably stable.
Yet investors will surely be forced to rethink their 2023 strategies. The implications of the world’s most dovish central bank turning hawkish are too big to ignore.
Japan is the world’s largest creditor country, meaning there is a vast pool of cash potentially waiting to come home to higher rates of return.
Japan’s net international investment position, the difference between the stock of assets it holds overseas and stock of Japanese assets held by foreigners, is more than $3 trillion.
An effective doubling of Japan’s long-term risk-free rate to 0.50% will turn some domestic investors’ heads. And with Japan’s portfolio investment assets and liabilities totaling $7.3 trillion, big yen moves could spill over to global leverage, hedging and derivatives exposures.
Graphic: U.S.-Japan yield differential –
Investors have a couple of days to digest Haruhiko Kuroda & Co’s bombshell before the November’s inflation report is released on Friday.
Inflation has exceeded the BOJ’s 2% target for seven straight months as of October, and is expected to have risen to a new 41-year high of 3.7%.
As Washington-based consultant and former World Bank economist Philip Suttle notes, Kuroda can justifiably claim to have ended deflation. Over his 10-year tenure as BOJ governor, consumer prices have risen an average 0.77% year-on-year, compared with average 0.13% decline in the decade before.
Out of the frying pan of deflation, into the fire of tighter policy and draining liquidity.
Three key developments that could provide more direction to markets on Wednesday:
– Canada CPI inflation (November)
– South Korea PPI inflation (November)
– U.S. consumer confidence (December)
