Something has to give when you are adding to imbalances like this and, surely, this has an endgame when the BoJ buys the last JGB and the market sets interest rates?
Meantime the other side of sticking to YCC while the Fed tightens has been weak JPY. Apparently too weak for political society? Possible the weakness of JPY prompted the BoJ to take this action? Possible Kuroda willing to take the flak before handing over?
But does it end the pressure on JPY to weaken? After all, demographics are awful and growth potential remains ~0% even with the artificial interest rate world preserving employment.
Hi! I read your Substack article and then asked you questions about it. Thanks for the link to the Toyo Keizai - now I see it's the same article.
With JPY 1y1y forward swap rate now 40bp and 1y1y swaption vol up at 80 the market (which was already starting to price a shift in the interest rate regime) has now made a step shift in forward pricing. It seems as if BoJ is likely to move rates to positive on Jan 18th?
Beyond Japan: might this start the unravelling of an extended period of Japan shipping its savings offshore in search of return? We've seen what happens when high carry currencies like Turkish Lira and Argentine Peso reach their denouement but we have not yet see what happens if Japanese money abandons more stable regimes.
I'm glad to hear you read it. Because you had problems with WSJ, I had wondered if you had done so. Your opinion is a growing one in the market, including the fear of Japan lowering the amount of its capital outflow. My point was that the BOJ's move was not a shift in policy, but a tactic aimed at preserving the current policy. What happens with the next Governor remains to be seen. It also remains to be seen whether victory will go the part of the market that sees a change in BOJ policy in 2023. I can point to forces that will affect the balance of power here: the course of inflation and interest rates in the US and, to a lesser extent, Europe, the course of inflation and wages in Japan, the viewpoint of the next BOJ governor, etc.
It is not my opinion that the market is pricing a policy change, but my observation that the rate and rates volatility markets have already priced it. I agree this doesn't mean it will happen. I agree this is a complex, organic system.
However, it is worth thinking about why the tactic is required of teh BoJ and whether it indicates the Kuroda-era policy framework has reached its limit. At some point the BoJ will have bought the last JGB from the last free market participant and all that's left is to buy JGB direct from MoF. The tactic suggests this is already happening to such an extent that the free market for interest rates is moving independent of BoJ policy. This might be why swap rates and swap volatility are spiking and why FX vol is moving so much.
In short, what if market pricing ceases to be set by the BoJ because the thing the BoJ controls is not reflective of anything other than government financing. This seems ridiculous to me (as I write it) because the government has the ability to tax the economy but if the BoJ is no longer setting the rate at which business is transacted it becomes something to think about.
Something has to give when you are adding to imbalances like this and, surely, this has an endgame when the BoJ buys the last JGB and the market sets interest rates?
Meantime the other side of sticking to YCC while the Fed tightens has been weak JPY. Apparently too weak for political society? Possible the weakness of JPY prompted the BoJ to take this action? Possible Kuroda willing to take the flak before handing over?
But does it end the pressure on JPY to weaken? After all, demographics are awful and growth potential remains ~0% even with the artificial interest rate world preserving employment.
For my views on this, read https://richardkatz.substack.com/p/my-wsj-post-on-the-yen-with-free
Thank you but WSJ makes it very difficult to read and I banned myself from subscribing to WSJ/FT/Bank research etc in favour of Twitter and Substack.
Are you allowed to post a modified version of your views on Substack?
So, you commented prior to reading my piece? I had included a free link to WSJ, but you can also see: https://toyokeizai.net/articles/-/641404.
Hi! I read your Substack article and then asked you questions about it. Thanks for the link to the Toyo Keizai - now I see it's the same article.
With JPY 1y1y forward swap rate now 40bp and 1y1y swaption vol up at 80 the market (which was already starting to price a shift in the interest rate regime) has now made a step shift in forward pricing. It seems as if BoJ is likely to move rates to positive on Jan 18th?
Beyond Japan: might this start the unravelling of an extended period of Japan shipping its savings offshore in search of return? We've seen what happens when high carry currencies like Turkish Lira and Argentine Peso reach their denouement but we have not yet see what happens if Japanese money abandons more stable regimes.
I'm glad to hear you read it. Because you had problems with WSJ, I had wondered if you had done so. Your opinion is a growing one in the market, including the fear of Japan lowering the amount of its capital outflow. My point was that the BOJ's move was not a shift in policy, but a tactic aimed at preserving the current policy. What happens with the next Governor remains to be seen. It also remains to be seen whether victory will go the part of the market that sees a change in BOJ policy in 2023. I can point to forces that will affect the balance of power here: the course of inflation and interest rates in the US and, to a lesser extent, Europe, the course of inflation and wages in Japan, the viewpoint of the next BOJ governor, etc.
Thank you.
It is not my opinion that the market is pricing a policy change, but my observation that the rate and rates volatility markets have already priced it. I agree this doesn't mean it will happen. I agree this is a complex, organic system.
However, it is worth thinking about why the tactic is required of teh BoJ and whether it indicates the Kuroda-era policy framework has reached its limit. At some point the BoJ will have bought the last JGB from the last free market participant and all that's left is to buy JGB direct from MoF. The tactic suggests this is already happening to such an extent that the free market for interest rates is moving independent of BoJ policy. This might be why swap rates and swap volatility are spiking and why FX vol is moving so much.
In short, what if market pricing ceases to be set by the BoJ because the thing the BoJ controls is not reflective of anything other than government financing. This seems ridiculous to me (as I write it) because the government has the ability to tax the economy but if the BoJ is no longer setting the rate at which business is transacted it becomes something to think about.