Weekly Kick Start | 06 November 2023

The focal point last week centered on central bank meetings. The FOMC meeting proved largely uneventful, with the Federal Reserve keeping rates unchanged as widely anticipated. In contrast, the Bank of Japan (BOJ) began shifting towards an exit from its monetary easing strategy. This significant shift has prompted us to concentrate on the BOJ’s decision in this week’s recap.

On Top of Our Mind This Week: BOJ highlights its stance on interest rates

JPY/USD Chart (Source: Google Finance)

Bank of Japan Eases Grip on Long-Term Yields Amid Market Distortions

The Bank of Japan (BOJ) recently took a symbolic step towards the eventual end of a program designed to maintain low borrowing costs while addressing concerns that it has distorted the bond market. During a two-day meeting, the BOJ’s Policy Board redefined the 1.0 percent ceiling, which the central bank had set in July, as “the upper bound” for 10-year Japanese government bond yields. Despite this policy adjustment, BOJ Governor Kazuo Ueda expressed confidence that 10-year yields would not significantly exceed 1.0 percent, even if they better reflect economic fundamentals.

Inflation Outlook Raised as the BOJ Seeks to Maintain Ultra-Low Rates

The BOJ made this decision while simultaneously raising its inflation outlook to 2.8 percent for both fiscal years 2023 and 2024, implying that inflation would remain above the 2 percent goal for three consecutive fiscal years. Governor Ueda attributed the unexpected rise in yields to faster-than-anticipated increases in U.S. Treasury yields, and he described the decision as “preemptive” in addressing foreign exchange volatility and improving bond market functionality.

Striking a Balance Between Flexibility and Monetary Policy

With the new approach, the BOJ aims to avoid the side effects of maintaining a rigid upper limit on yields, which would necessitate increased bond-buying as yields approach the threshold. While the BOJ is eliminating a fixed cap, Governor Ueda does not anticipate a sharp increase in long-term yields from 1.0 percent. The central bank plans to adjust its bond-buying operations based on the pace and levels of yield movements. The yen experienced a significant drop against the U.S. dollar following the BOJ’s decision, prompting concerns about potential intervention by Japanese authorities.

Future Challenges for the BOJ: Policy Normalization and Inflation Target

Despite maintaining a dovish stance and pledging further easing measures if necessary, the BOJ’s recent adjustment raises questions about when it will move closer to policy normalization by scrapping the yield curve control program and ending negative rates. This move comes as the BOJ faces a complex monetary policy landscape, including persistent yen weakness resulting from previous monetary easing and an inflated balance sheet due to massive bond purchases aimed at keeping borrowing costs low and achieving stable inflation.

Market Recap This Week

Equity indexes experienced a notable positive turnaround, with both the S&P500 and NASDAQ surging by 5.9% and 6.6%, respectively. This shift in momentum was primarily attributed to the diminishing expected volatility as the week advanced. Even the Hang Seng Index registered a 1.5% increase. In contrast, the commodities sector witnessed a pullback, with oil prices plummeting by as much as 5.4%. 10-Year Treasury Yields also saw a decrease of approximately 30 basis points, signaling a potential path of clarity emerging for interest rates. Meanwhile, Bitcoin continued its upward trend, closing 2.5% higher.

Source: Google Finance, Syfe Research, 04 November 2023 

What is on the Radar for This Week? 

In the weeks ahead, the spotlight will be on the Reserve Bank of Australia’s (RBA) interest rate decision, a key event that is eagerly anticipated by market participants. Additionally, investors will closely watch for remarks from the Federal Reserve Chair, along with the release of initial jobless claims data

Source: Channel News Asia, Bloomberg, Google Finance