dChan
Anonymous ID: 453f63 Nov. 2, 2023, 2:10 p.m. No.19850132   🗄️.is đź”—kun   >>0424 >>0569 >>0696 >>0734

>>19845054, >>19848492 pb

(wasn’t lying’ in above posts….thanks for confirmation B’Berg and you are already starting to see the equity melt up in the Nikkei in anticipation and moar charts in linky on net currency positions etc referenced in article)

 

Bank Of Japan Is Brewing A Storm In Global Markets

 

The Bank of Japan’s incessantly loose monetary policy is stoking underlying imbalances in global markets that are poised to lead to a sudden and rapid increase in asset volatility. The yen is likely to rally hard, US versus Japanese short-term yield spreads tighten, and domestic equities rise.

The BOJ never misses an opportunity to miss an opportunity. Once again, the bank chose not to exit its ultra-loose policy stance and allow the huge market imbalances building up to ease. Instead, we got a technocratic tweak to yield curve control (YCC) and no increase in the only negative policy rate left in the world.

 

But the superficial stability in Japanese yields is stoking enormous instability in markets around the world. The longer this persists, the greater the ultimate reckoning. The asset moves are likely to be considerable when the BOJ finally tightens. In this column, I’ll focus on where we could see some of the most asymmetric reactions:

  • a yen rally likely to exceed expectations in its speed and extent as lapsed FX-hedging ratios are re-established, and some foreign capital is repatriated

  • rises in US and other DM longer-term yields

  • a rapid increase in short-term rate expectations in Japan versus the US

  • Japanese equities to rise (which mostly benefits the BoJ cuz they own most of it)

 

The BOJ cannot fight against the global tightening tide indefinitely (but they can play the waiting game which is exactly what they are attempting to do….wait out other Sovs raise and lowering of them) Financial instability risks are rising, both abroad and at home. Most overtly, we can see that in the size of the BOJ’s balance sheet -at almost $6.5 trillion, it is the largest in the world in GDP terms, and substantially higher than the Fed’s or the ECB’s.

 

Furthermore, the BOJ owns more than half of JGBs (prolly close to 65-70% by nao) outstanding, increasingly blurring the lines between fiscal and monetary policy, and adding to financial instability risks.

Core inflation is running at a 30-year high and is looking sticky despite headline CPI beginning to roll over. Moreover, household inflation expectations are showing signs of becoming embedded after turning back up after a brief drop, and remain at their series highs (see posts above) What makes all of this so important for the rest of the world is Japan’s huge net creditor position. Decades of current account surpluses have accumulated to create the world’s largest NIIP (net international investment position): $3.3 trillion of investments held abroad.When it comes to assets, Japan sneezing means the rest of the world catches a cold.

 

That sneeze will come when the BOJ begins to significantly tighten policy, with the yen the main adjustment mechanism. USDJPY has been pulled higher by the attraction of carry trades backstopped by the BOJ. The currency pair sailed through 150 this week when the central bank left its policy stance largely unchanged.

But when the BOJ tightens, the capital flows will reverse and the yen will rally – with force and speed likely to catch most unawares. The main driver will be FX hedge ratios. These have been allowed to fall or lapse altogether by Japanese investors as the yen has weakened. Japan holds over $1.1 trillion of Treasuries, as well as US corporate debt, and non-trivial amounts of European, UK and Australian government and corporate debt, which means the impact of its capital decisions will pressure global yields higher at the margin.

It’s harder to say what will happen to yield spreads, e.g. the 10y US versus Japan spread, as capital repatriation should limit the rise in JGB yields. However, at the shorter end spreads should narrow, perhaps substantially. The trillion dollar question is: when will the BOJ exit its policy? The market expects the first 25 bps policy-rate rise by July, but given the mounting imbalances and financial instability, it could come sooner than that.Either way, the longer the bank waits, the more likely it is the market will make the decision on its behalf.

https://www.zerohedge.com/markets/bank-japan-brewing-storm-global-markets