Wall Street just received a big lump of Christmas coal.
A surprise announcement from the Bank of Japan sent investors spinning and global markets reeling on Tuesday. The country's central bank signaled that it would reverse two decades of policy precedent and begin to move away from loose monetary policy intended to keep wages and prices high.
The move, which opens the door to future rate hikes, stoked investors' fears that the global war on inflation is still roaring on and that recession is unavoidable.
What's happening: The theme of 2022 has been higher interest rates. Over 90% of central banks have hiked rates this year, making the (mostly) globally coordinated effort to fight persistent inflation unprecedented, according to LPL Financial. There has, however, been one notable exception to the rule: Japan.
That all changed this week. The Japanese Central Bank loosened the yield on its 10-year government bonds from 0.25% to 0.5%. At the same time, the bank will increase its monthly bond purchases to $67 billion from around $55 billion.
The move sent the yen soaring to a four-month high against the US dollar, its largest one-day jump in 24 years and wreaked havoc on global stock and bond trading.
Why it matters: Japanese rates remain low, but Tuesday's move means that the world's third-largest economy now sees inflation as a risk.
That's a big change: Japan had been keeping inflation low for decades in efforts to fight a prolonged strong yen and deflationary recession that stagnated the Japanese economy. Lately, the country has felt the impacts of an aging and falling population which has kept consumer demand and inflation low.
The BOJ policy minutes noted the shift. Core consumer price rises are now around 3.5%, still lower than in the United States and Europe but an increase from the previous statement. The central bank said that inflation expectations have risen.
Japan's is the last major central bank to keep rates negative and this signals that it could be shifting its stance. That heightens investor expectations for more upsetting inflation news in 2023 and increased market volatility. They worry that Japan's shift away from ultra-low rates will be the final nail in the coffin of the easy money era and will once again increase global bond yields.
"This BOJ move (like the removal of any other "peg") along with the potential for more to come, supports volatility [in the year ahead]," wrote Bruno Braizinha and Mark Cabana, rates strategists at Bank of America.
In a news briefing, BOJ governor Haruhiko Kuroda said it was "too early to consider reviewing or exiting" its current easing policies, but that didn't stop markets from reacting.
"Whatever the BOJ calls this, it is a step toward an exit," said Masamichi Adachi, chief Japan economist at UBS Securities. "This opens a door for a possible rate hike in 2023 under a new governorship."
Comments
Post a Comment