By Jamie McGeever
(Reuters) – A look ahead for the day ahead in Asian markets by Jamie McGeever.
In many ways, the Bank of Japan’s bolt from the blue on Tuesday was the perfect bookend for one of the most turbulent years on record for financial markets.
The BOJ’s effective tightening impact on Japanese assets was immediate and significant – the Nikkei fell 2.5%, the yen had its best day in years and the 10-year JGB yield posted its biggest rise in almost two decades.
Chart: JGB 10Y Yield – Daily Change (bps) – https://fingfx.thomsonreuters.com/gfx/mkt/zjvqjjodrpx/JGB10Y.png
However, the impact on global markets could be more of a perennial.
Although the MSCI Asia ex-Japan Index fell and US Treasury and other government bond yields rose on Tuesday, the MSCI World Index and Wall Street rallied and exchange rates for major non-yen currencies were remarkably stable.
But investors will certainly be forced to reconsider their strategies for 2023. The implications of the world’s most dovish central bank turning hawkish are too great to ignore.
Japan is the world’s largest creditor country, which means there’s a huge pool of cash potentially waiting to come home with higher yields.
Japan’s net international investment position, the difference between the stock of assets it holds abroad and the stock of Japanese assets held by foreigners, is more than $3 trillion.
An effective doubling of Japan’s long-term risk-free interest rate to 0.50% will turn some domestic investors’ heads. And with Japan’s portfolio assets and liabilities totaling $7.3 trillion, large yen moves could spill over into global leverage, hedging and derivatives exposures.
Chart: Yield differential between US and Japan – https://fingfx.thomsonreuters.com/gfx/mkt/zgpobbzzjvd/Pasted%20image%201671554763741.png
Investors have a few days to digest Haruhiko Kuroda & Co’s bombshell before November’s inflation report is released on Friday.
The story goes on
Inflation has exceeded the BOJ’s 2% target for seven straight months since October and is expected to have risen to a new 41-year high of 3.7%.
As Washington-based consultant and former World Bank economist Philip Suttle points out, Kuroda can rightly claim to have ended deflation. During his 10-year tenure as BOJ governor, consumer prices have risen an average of 0.77% year over year, compared to an average decline of 0.13% a decade earlier.
Get out of the frying pan of deflation and into the fire of tighter monetary policy and dwindling liquidity.
Three key developments that could give markets more direction on Wednesday:
– Canada CPI Inflation (November)
– PPI inflation in South Korea (November)
– US Consumer Confidence (December)
(Reporting by Jamie McGeever in Orlando, Fla.; Editing by Josie Kao)
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