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Yen Falls As BOJ To Push Ahead With Yield Curve Control

Published 21/12/2016, 09:52 am
Updated 09/07/2023, 08:32 pm

Originally published by Rivkin Securities

Tuesday was a quiet day for data releases with the focus instead on central banks. The Bank of Japan kept its monetary policy unchanged with interest paid on certain reserves at -0.1% while also targeting a ten-year yield on government bonds around 0%. A global sell-off in bonds has pushed yields higher thanks to expectations of inflationary policies by president-elect Donald Trump as well as a higher expected path for interest rates in the US. This has pushed the yield on ten-year Japanese governmentJapan 10-Year bonds up to +0.069% up from the record low on July 29th at -0.291%.

Speculation is now around whether the BOJ will be able to effectively control the yield curve, at the moment it’s too soon to tell although concerns are well founded. The bank has effectively promised a blank cheque to purchase bonds at a fixed level, this should help stimulate the economy while weakening the yen as the rate differential between Japan and the US widens. Governor Kuroda downplayed the likelihood of this in a press conference stating rising yields would not be allowed. The continued effect of this should be bearish for the yen and bullish for Japanese equities. However market forces can often be more powerful than a central bank and this will need to be monitored closely with some market participants are calling for the bank to raise the target from around 0% to cope with this.

The yen weakened -0.62% against the U.S. dollar to trade at 117.81 at the time of writing having risen from an August low of 99.53 shown on the chart below. Japanese equity markets reversed initial declines to finished higher, both the Nikkei & Topix up +0.53% & +0.21% respectively.

The BOJ will certainly be pleased with the weakening Yen, as will prime minister Shinzo Abe given Japan’s reliance on exports a weaker Yen increases the profitability of those companies. The statement accompanying the monetary policy decision also cited an improved economy outlook while continuing to highlight risks facing the global economy including geopolitics, emerging market developments, and the U.K. negotiations to withdraw from the EU. Despite the optimistic outlook in the statement Japan continues to face both secular and structural issues.

Locally the S&P/ASX 200 gained +0.5% while the Australian dollar was flat in trade this morning, up just +0.04%. This follows from the release of the minutes from the December policy meeting, where the board kept interest rates unchanged at the record low 1.50%. The minutes painted a mixed outlook as the bank weighed concerns about rising housing prices with those of a weakening labour market. While the headline unemployment rate is improving, there is considerable slack in the Australia labour market which is likely to continue for some time.

The economic outlook in Australia remains mixed and that should keep interest rates unchanged in the coming months. This is another tailwind combined with improving sentiment globally, a stabilising Chinese economy and both rising commodity prices & bond yields boosting the cyclical sectors of resources & financials. These sectors having the heaviest weighting for the S&P/ASX 200 and combined with the above mentioned tailwinds should continue to be supportive for Australian equities.

Following the lead of US equity markets we can expect a positive start to trading this morning with ASX SPI200 futures up 14 points in overnight trading.

Data releases:

· Australian Westpac Leading Index (MoM Nov) 10:30am AEDT

· U.K. Public Finances & Net Borrowing (MoM Nov) 8:30pm AEDT

· Euro-zone Consumer Confidence (MoM Dec) 2:00am AEDT

· U.S. Existing Home Sales (MoM Nov) 2:00am AEDT

· U.S. Crude Oil Inventories (Dec 16th) 2:30am AEDT

Chart 1 – USD/JPY

Chart

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