The Bank of Japan's decision, described yesterday, to raise the range for interest rate fluctuations on Japanese 10-year bonds to 0.5 percent may still have its consequences for financial markets. These may no longer just be looking at a change in the control of the yield curve, but may increasingly assume a change in interest rates.
Since the beginning of 2016. The Bank of Japan has held its main interest rate at -0.1 percent and holds the world record for this. Nowhere else, in any other country, are interest rates as low as in Japan. Even the Swiss have abandoned this and raised their main interest rate to 1 percent, while the Japanese, for the moment, have allowed a larger bond sell-off and an increase in the yield on their debt, under what is possible to be an onslaught of global interest rate increases. At present, however, the market seems to expect that this is only the beginning of the BoJ's actions. The next step the Bank of Japan may take is to change the interest rate itself. Investors in this market seem to expect it to rise to 0.3 percent in a year. Adding to this the expectation of a slow end to interest rate hikes in the U.S., it could turn out that in 2023 Japan would lead expectations for interest rate hikes. This could significantly affect the yen or the Japanese stock market.
Yen exchange rate and Nikkei
The Japanese yen oscillated around the 132-per-dollar level on Wednesday, after rising nearly 4% during the previous session to reach levels not seen in more than four months. Overall, after the second intervention in the foreign exchange market, which took place in October, the USD/JPY exchange rate fell by 14 percent. This was a retreat from levels last seen in 1990. Going back to that history, and especially to 1998, where the Bank of Japan also intervened in the market at JPY 147-148, the USD/JPY exchange rate fell to JPY 102 the following year. If the Fed ended the hike cycle in the first half of 2023, such a scenario could be repeated.
Source: Conotoxia MT5, USDJPY, Weekly
The Nikkei 225 index fell 0.68% to close at 26388, while the Topix index lost 0.64% and fell to 1893 on Wednesday, extending the sharp decline triggered by the Bank of Japan's surprise policy change. Technology stocks led the market lower. Meanwhile, Japanese banks extended gains in anticipation of better returns from rising interest rates, including Mitsubishi UFJ (3.9%). Sumitomo Mitsui (4.1%) and Mizuho Financial (2.2%).
Source: Conotoxia MT5, Mitsubishi UFJ, Weekly
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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