The Bank of Japan (BoJ) has bought more than half of the government bonds from the market to implement its financial policies. The BoJ is now the largest holder of foreign debt, including US bonds. However, the problems of the US banking sector could become another argument for the Japanese central bank to change its policy. How could this affect the financial market?
Capital outflows from Japan are growing
Since the introduction of the Bank of Japan's yield curve control policy in 2016, it has become clear that this may involve interventions in open market operations. However, Japanese government bonds are not the only assets that the BoJ has been indirectly buying. According to the Bloomberg website, during the frenzied demand for Japanese printed money, local funds together with the BoJ became, among other things, the largest holders of US debt (about 3 per cent worth about US$1 trillion). They also bought about 10 per cent of Australia's debt, 8 per cent of New Zealand's securities and 7 per cent of Brazil's debt.
This could be a threat to global financial markets if Japanese bond yields rise. Current BoJ Governor Kazuo Ueda might dismantle his predecessor's legacy, preparing the ground for a reversal of investment outflows from the country. Nonetheless, capital outflows from investments in the country appear to have intensified since February this year. Could this be another sign that the central bank will remain the only buyer in this market?
Source: TradingEconomics, Investment in shares by foreigners
Can we expect a change in BoJ policy?
It looks like the world's central banks would tighten their policies, and rising inflation in Japan (above 3 per cent) means investors should brace themselves for the end of a decade of ultra-low interest rates, which have negatively affected savers in Japan and contributed to a significant amount of money going overseas. Governor Ueda may have no choice but to end the so-called 'Cheap Money' experiment, which in turn would increase the BoJ's control over domestic banks, especially after the turmoil in the sector in the US and Europe. A rise in interest rates in Japan could also put the banking sector at risk and threaten global financial stability. It appears that this could lead to even greater capital outflows from the country, thereby leading to a repricing of the Nikkei index (JP225).
Source: Conotoxia MT5, JP225, Daily
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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