USDJPY, stocks, Gold wobbled on BOJ exit and US recession panic

·         Wall Street recovered on fading concern of a hard landing after  soft jobless claims data and less hawkish Fed & BOJ talks

·         But BOJ may gradually hike the repo rate to 2.75% from the present 0.50% by Dec’26 (against the Fed’s projected longer-term terminal repo rate of 3.25% from the present 5.50%)

·         If BOJ indeed hikes 10-11 times against the Fed’s cuts, then USDJPY may hover around 140-120 levels in the coming months rather than 140-160 levels

·         Gold has a roller coaster move on Israel-Iran tension and hopes for an imminent Gaza war ceasefire

On 31st July, apart from the Fed a few hours later, some focus of the market was also on the other side of the Pacific and also amid recent hawkish jawboning by BOJ/JP policymakers to hike rates after exiting NIRP (selective negative reverse repo rate) and YCC policy. The market was expecting a rate hike of +0.10% in reverse repo to +0.20% against +0.30% repo rate; i.e. BOJ may hike/normalize only reverse repo (CDF deposit rate), which was hiked to +0.10%, just above zero from previous NRIP/ZRIP regime as a part of BOJ exit/normalization process to bring Japanese economy from decades of deflation.

But on Tuesday (30th July), ahead of the Fed (late Wednesday) and BOJ (early Wednesday), BOJ floated an idea that it may hike the reverse repo rate by +0.15% to +0.25% along with QE tapering against present market consensus +0.10%. Japan's finance ministry and cabinet office are expected to accept a BOJ rate hike, although it may be negative for the government and PSU finances, it may be good for Japanese banks. It was not clear whether BOJ will increase the repo rate (interest rate for complementary lending by BOJ to banks) to +0.50% from +0.30% to have a normal spread of +25 bps (min) with projected reverse repo rate +0.25%.

On Tuesday after the BOJ rate hike/normalization talks, JGB 10Y bond yield surged over +1.10%, while USDJPY slumped to almost 152.00 (from 162 a few weeks ago amid BOJ active intervention). On the other side, due to very low interest back home, Japan is the exporter of capital globally, the main source of funding for so-called carry trade, tech, and other startups. Thus NQ-100, which was already under pressure due to the subdued Nvidia report card, tumbled further along with overall Wall Street.

In any way, BOJ may also go for higher-than-expected QE tapering along with a +0.10% rate hike instead of the ‘unthinkable’ +0.25%. Last week, Motegi, a senior ruling party official in Japan, urged the BOJ to more clearly communicate its plan to normalize monetary policy through steady rate hikes, adding that excessive yen declines were negatively impacting the economy. Japan’s PM Kishida also said that the normalization of the BOJ’s monetary policy would support Japan’s transition to a growth-driven economy (from decades of deflation). However, the normalization of BOJ’s ultra-loose bazooka may be still hugely negative for the global financial market, especially for EMs.

On Friday, BOJ hiked only overnight reverse repo rates by +0.15% to +0.25% (uncollateralized overnight call rate at CDF) as highly expected to discourage banks from lending indiscriminately. Previously, BOJ tried to encourage banks to lend at ease by keeping the reverse repo rate at negative or almost zero levels, so that banks had to employ their excess funds in lending rather than keeping at the safe deposit window of BOJ and earn negative income. The BOJ also hiked its repo rate by +0.20% to +0.50% and announced the QE tapering by 50% to around JPY 3T/month from the present QE rate of JPY 6T/M; QE tapering arte JPY -0.4T/QTR.

Full Text of BOJ statement of monetary policy: 31st July’24

Change in the Guideline for Money Market Operations and Decision on the Plan for the Reduction of the Purchase Amount of Japanese Government Bonds

1. At the Monetary Policy Meeting (MPM) held today, the Policy Board of the Bank of Japan decided, by a 7-2 majority vote, to set the following guidelines for money market operations for the inter-meeting period:

The Bank will encourage the uncollateralized overnight call rate to remain at around 0.25 percent.

2. Regarding the reduction of its purchase amount of Japanese government bonds (JGBs), the Bank decided, by a unanimous vote, on a plan to reduce the amount of its monthly outright purchases of JGBs so that it will be about 3 trillion yen in January-March 2026. The amount will be cut down by about 400 billion yen each calendar quarter in principle.

3. In accordance with the change in the guideline for money market operations, the Bank made the following decisions, including changes to the interest rates applied to its measures, by a 7-2 majority vote.

 (1) Interest rate applied to the complementary deposit facility

The interest rate applied to the complementary deposit facility (the interest rate applied to current account balances held by financial institutions at the Bank, excluding required reserve balances) will be 0.25 percent.

(2) Basic loan rate

The basic loan rate applicable under the complementary lending facility will be 0.5 percent.

(3) Interest rates applied to new loan disbursements under the Fund-Provisioning Measure to Stimulate Bank Lending etc.

The interest rates applied to the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas and the Funds-Supplying Operations to Support Financing for Climate Change Responses will be 0.25 percent. Regarding the Fund-Provisioning Measure to Stimulate Bank Lending, the Bank will provide the loans on a floating rate basis.

4. Japan's economic activity and prices have been developing generally in line with the outlook presented in the previous Outlook for Economic Activity and Prices (Outlook Report). In the corporate sector, business fixed investment has been on a moderately increasing trend, with corporate profits improving. In the household sector, private consumption has been resilient despite the impact of price rises and other factors.

On the wage side, moves to raise wages not only have been seen for large firms, which achieved wage increases that were significantly higher than those seen in the previous year in this year's annual spring labor-management wage negotiations, but also have been spreading across regions, industries, and firm sizes.

On the price front, although the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices have waned, services prices have continued to rise moderately, with a strengthening of moves to reflect wage increases in selling prices. Inflation expectations of firms and households have risen moderately. The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require attention.

In view of these circumstances, the Bank judged it appropriate to adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent. Real interest rates are expected to remain significantly negative after the change in the policy interest rate, and accommodative financial conditions will continue to firmly support economic activity.

5. As for the future conduct of monetary policy, while it will depend on developments in economic activity and prices as well as financial conditions going forward, given that real interest rates are at significantly low levels, if the outlook for economic activity and prices presented in the July Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation. With the price stability target of 2 percent, it will conduct monetary policy as appropriate, in response to developments in economic activity and prices as well as financial conditions, from the perspective of sustainable and stable achievement of the target.

BOJ Notes:

1 The new guideline for money market operations will be effective from August 1, 2024.

2 Regarding purchases of CP and corporate bonds, the Bank will conduct the purchases in accordance with the decisions made at the March 2024 MPM.

3 The new interest rate applied to the complementary deposit facility and the new basic loan rate will be effective from August 1, 2024. With a view to further facilitating money market operations, the Bank also decided to introduce a fixed-rate method for sales of Japanese government securities (JGSs) with repurchase agreements.

4 The basic loan rate is stipulated in Article 15, paragraph 1, item (ii) of the Bank of Japan Act. The basic discount rate in item (i) in the same paragraph also will be 0.5 percent (discounting of bills is currently suspended).

Note:

Voting for the action: UEDA Kazuo, HIMINO Ryozo, UCHIDA Shinichi, ADACHI Seiji, NAKAGAWA Junko, TAKATA Hajime, and TAMURA Naoki. Voting against the action: NAKAMURA Toyoaki and NOGUCHI Asahi. Nakamura Toyoaki dissented, considering that the Bank should decide on changing the guideline for money market operations after assessing sources such as the Financial Statements Statistics of Corporations by Industry at the next MPM, and that therefore it was desirable to only indicate this approach at this MPM. Noguchi Asahi dissented, considering that it was necessary to more carefully assess how the economic situation had improved with wage hikes becoming widespread, based on relevant data

The overall impact on the market: After BOJ hike

·         JGB QE taper announcement disappoints, as less tapering is set out by the BoJ for 2024, 2025, and 2026, leading to the yen weakening post the rate hike

·         BoJ Rate Decision Actual 0.25%, Forecast 0.1%, Previous 0.1% [Yen whipsaws]

·         Yen and Japanese Stocks Rise Following BoJ Rate Hike

·         Given the Yen's importance as a carry trade currency, the decision will have an impact on global financial markets

·         Japanese stocks fell by the most since 2020, with the Yen rising as traders braced for more interest rate hikes from the BoJ. Oil prices rose for a second day on Middle East tensions.

·         Japan's equity losses contrasted with gains in Taiwan and South Korea after the Fed indicated on Wednesday that it is close to reducing interest rates in September. US index futures gained, adding to Wall Street gains, after Meta announced higher-than-expected sales after the close.

·         The contrasting fortunes mirrored traders' expectations that US-Japan interest rate differentials would reduce following Wednesday's two central bank announcements. After rising interest rates. Kazuo Ueda, Governor of the BoJ, stated that if its pricing expectations are reached, further rises will follow. Japan's Topix index fell over 4% before trimming losses, as the Yen reached 148.51 against the Dollar, its highest level since March. The currency has risen about 8% in the last month

·         Banks and other financial institutions urged to increase holdings of Japanese Government Bonds

Highlights of BOJ MPC and Govt. Ueda statement/Q&A: 31st July’24

·         BOJ warns of rising import prices, urges vigilance against risk of inflation overshoot

·         Exchange Rate Fluctuations Will Have Stronger Impact on Prices Than Before

·         BOJ report shows recent shift towards increased wages and prices by firms

·         BOJ to buy approximately JPY 2.9T of Japanese Government Bonds in Q1 2026

·         BOJ to purchase approximately JPY 3.7T of JGBs in July-September 2025

·         BOJ to buy JGBs worth around JPY 4.1T during April-June 2025

·         BOJ to purchase approximately JPY 4.5T of JGBs in Jan-Mar 2025

·         BOJ to buy JGBs worth approximately JPY 4.9T maturing in October-December 2024

·         BOJ to buy approximately 5.3 trillion yen of JGBs maturing in August-September 2024

·         BOJ to purchase approximately 5.7 trillion yen of Japanese government bonds in July 2024

·         BOJ sees FX developments as more likely to affect prices than in the past

·         BOJ to reduce JGB holdings by about 7-8% starting mid-2024

·         BOJ report highlights uncertainty surrounding Japan's economic activity and prices

·         BOJ to adjust bond-taper plan if necessary for JGB market functioning

·         BOJ Report: Vulnerability of Financial System Could Increase Due to Search for Yield Behavior

·         BOJ to discuss guidelines for JGB buying from April 2026 at June 2025 meeting, announces results

·         Monthly Bond Buying to Remain at 5.3 Trillion Yen from August to September

·         BOJ sees economy and prices developing broadly in line with forecasts

·         BOJ projects a moderate increase in private consumption

·         Low Real Interest Rates Detected

·         BOJ sees increased FX impact on prices

·         The BOJ sees resilient private consumption despite price impact

·         BOJ to maintain supportive conditions for the economy

·         BOJ expects significantly negative real rates

·         BOJ: Will continue to raise policy rate if price outlook materializes

·         BOJ: Will continue to raise policy rate if price outlook materializes

·         BOJ sees significantly low real interest rates

·         BOJ sees price risks tilted toward the upside for fiscal years 2024 and 2025

·         BoJ reports: Private consumption remains strong despite increasing prices

·         Bank of Japan to Review Bond-Buying Plan at Policy Meeting if Necessary

·         BOJ hints at reducing bond purchases in the latest monthly operation

·         BOJ responds to sudden increases in yields

·         BOJ to adjust bond purchase plan as necessary

·         BOJ to conduct a mid-term evaluation on bond purchases in June 2025

·         BOJ warns of needed attention to upside risks to prices

·         BOJ to adjust monetary policy as economic outlook becomes clearer

·         BOJ: Yen loses most gains after initial surge

·         BOJ Quarterly Outlook Report: Japan's Economy Recovering Moderately with Some Weakness Seen

·         BOJ reveals exact figures for bond purchases instead of ranges

·         BOJ decides on rates with a 7-2 majority vote

·         BOJ to buy JGBs worth 3 trillion yen on a monthly basis from January to March 2026

·         BOJ to Announce Quarterly Amount of JGB Purchases

·         BOJ report shows economic risks skewed to the upside for fiscal 2025

·         BOJ to Reduce Bond Purchases to 3T yen Monthly as of Q1 2026

·         BOJ to reduce purchase amount of Japanese government bonds in a predictable manner

·         BOJ to reduce (taper) bond purchases by JPY400bn per quarter (JPY 0.4T/QTR)

·         BOJ: Board Expects Core CPI (W/O Fresh foods) to Reach 2.5% by Fiscal 2024, Lower Than April Forecast

·         BOJ sees Core-Core CPI (W/O food & fuel) at +1.9% for the fiscal 2024 median forecast, unchanged from April

·         BOJ sees lower 2024 median forecast for real GDP at 0.6% compared to 0.8% in April

·         BOJ maintains FY2025 GDP forecast at 1.0%

·         BOJ projects FY2025 core CPI, excluding food & energy, at 1.9% compared to the previous estimate of 1.9%

·         BOJ projects core CPI to reach 2.1% in FY2025, up from 1.9% earlier

·         Bank of Japan Raises Policy Rate to 0.25%

·         BOJ Rate Decision Actual 0.25% (Forecast 0.1%, Previous 0.1%)

·         Summary of BoJ's Ueda's Speech

·         Real rates will likely remain significantly negative and easy financial conditions will keep supporting the economy

·         It's appropriate to taper JGB buying predictably whilst ensuring market stability by allowing flexibility

·         Private consumption remains solid despite inflation impacts seen

·         Momentum for wage growth is spreading at small and medium companies

·         We don't have a 0.5% policy rate in mind.

·         In our estimate, the size of the BOJ balance sheet will be 7-8% smaller in about 2 years but still bigger than desirable levels in the long-term.

·         If possible a US rate cut happens gradually; it could lead to strong a Yen

·         But also a strong US would provide some support to Japan's economy

·         I expect the BOJ to manage policy appropriately

·         BoJ's Governor Ueda:

·         But also a strong US would provide some support to Japan's economy

·         The weak yen was not necessarily the biggest reason for the rate hike

·         Hard to tell when the next rate hike may be

·         The weak Yen was not necessarily the biggest reason for the rate hike this time

·         I see the weak Yen pushing up prices as a key risk

·         Does not have a 0.50% policy rate in mind as a ceiling

·         It is hard to tell when the next rate hike may be as it depends on economic indicators

·         There is no preset timing for the next rate hike

·         The 0.25% rate is still extremely low, and if you think of real rates, it's profoundly negative

·         I don't believe the latest rate hike will trigger a strong brake on the economy

·         Economic indicators to be watched include wages, inflation, service prices, and the GDP gap

·         There won't be much upward yield pressure from the drop in holdings

·         The upward pressure on JGB interest rates is not so large

·         The weak Yen didn't have much of an impact on our price outlook

·         Some market participants expressed concerns about the outlook

·         JGB holdings will fall 7-8% in about two years

·         We will mull the terminal rate while assessing the impact of hikes

·         The major issue is where to stop raising rates when coming closer to neutral rates

·         But as of now, Japan's rates are far below the uncertain levels of the neutral rate

·         I don't believe the economy & prices will slow down due to an additional rate hike

·         In our estimate, the size of the BoJ balance sheet will be 7-8% smaller in about 2 years but still bigger than desirable levels in the long-term

·         We don't have a 0.5% policy rate in mind

·         We judged the spring pay negotiations' result as firmly reflected, looking at April-May wage data

·         Prices are getting more affected by foreign exchange swings compared to the past

·         Japan's economy is recovering moderately

·         I believe that wage hike moves will continue

·         I believe consumption is fairly solid

·         Momentum for wage growth is spreading at small and medium companies

·         Rising wages & income will continue to support private consumption

·         Private consumption remains solid despite inflation impacts being seen

·         Some market participants at the July meeting expressed concerns about the outlook

·         The views received at the bond market group meeting were reflected in our tapering plans

·         We will keep raising rates and adjust the degree of easing if the current economic & price outlook is realized.

·         We will respond nimbly if there's a sharp rise in long-term yields by increasing purchases and conducting fixed-rate operations

·         It's appropriate to taper JGB buying predictably whilst ensuring market stability by allowing flexibility

·         FX moves are more likely to affect inflation now than before

·         Long-term yields should be formed in financial markets in principle

·         Real rates will likely remain significantly negative and easy financial conditions will keep supporting the economy

·         It is judged appropriate to adjust the degree of easing from the perspective of the sustainable & stable achievement of 2% inflation

·         We must pay due attention to financial & FX markets, and the impact on Japan's economy & prices

·         Upside risks to prices require attention

·         Japan's economy is recovering moderately

·         BOJ Economic Outlook Report:

·         Big firms' positive wage-setting behavior is spreading steadily to smaller firms

·         Wages could come in hotter than expected in the latest quarterly outlook report

·         There is a chance that wages & inflation may exceed expectations, accompanied by higher inflation expectations and a tight labor market

·         We must scrutinize whether this year's strong wage negotiation outcome will be reflected in service prices

·         Price-setting behavior is changing in service-sector firms as a whole

 

Japan Chief Cabinet Secretary Hayashi:

·         I expect the BoJ to continue to conduct appropriate monetary policy toward sustainable, stable realization of the 2% price stability target in close coordination with the government

·         Expect BOJ to continue to conduct policy appropriately

·         Former Vice Minister Kanda appointed as Cabinet Adviser

·         Equity prices are determined in the market

·         Believes FX rate should reflect fundamentals and remain stable

·         Wage rises will spread in Japan

·         Emphasizes the importance of stable FX movements reflecting fundamentals

Japan finance minister Suzuki said:

·         Warns Japan may not have fully escaped deflation yet

·         Sees no plan to reduce sales tax at present

·         Concerned about the impact of weak yen on import costs

·         Japan has not fully escaped deflation yet

·         Fiscal health requires continued improvement

·         FX Stability Reflects the Importance of Fundamentals

·         Will continue to monitor stock movements

·         Monitoring of FX Market Moves to Continue

·         Government to continue analyzing the impact of foreign exchange on citizens

·         Sees impact of yields and forex on stocks

·         Emphasizes stable FX rates that reflect fundamentals

·         Recent currency movements have both advantages and disadvantages

·         Seeing bright aspects in Japan's economy

·         Sees stocks and forex movements driven by multiple factors

·         Aims to use all policies for sustained wage increases

·         Monitors market impact on wage increases

·         Announces BOJ's decision on monetary policy steps

On Tuesday (6th August), Japan’s PM Japan's Kishida said:

·         Emphasizes the importance of calmly analyzing the market situation

·         Sees positive real wages moving the economy to the next stage

·         Aims to closely coordinate with BOJ to manage the economy

·         Monitors market movements with a sense of urgency

·         Japan's ruling Liberal Democratic Party (LDP) big gun supports Bank of Japan rate hikes

On Wednesday (7th August), BOJ’s Deputy Governor Uchida said:

·         Markets are still volatile so it is unclear how that will affect the outlook

·         If market volatility changes our view on prospects for achieving the price goal, that will influence our decision on the rate hike path

·         It's hard to say how long it will take to gauge the impact of the market route on the economy & price

·         US soft landing is likely but not 100% certain

·         Urges caution when considering the timing of the next rate hike

·         Factors have emerged to make me more cautious about a rate hike

·         I think the stock markets will calm down at some point, given they reflect corporate earnings & the state of Japan's economy

·         When asked about the BOJ's next rate hike timing: I think there are now more factors that require being cautious

·         Market volatility is very large, so we will keep a close eye out on moves and their impact on the economy and prices

·         Real interest rates remain very low and will underpin the economy

·         Financial conditions remain very accommodative

·         Market volatility is very large, so we will keep a close eye out on moves and their impact on the economy and prices

·         We must watch the markets with a sense of urgency

·         Sees no rate hike during market instability

·         Rate trajectory to change if market developments impact economic forecast

·         Recent stock and forex volatility has implications

·         Sees need to maintain firm easing for now

·         To consider easing adjustments if the outlook materializes

Overall, Uchida was trying to calm markets after the BOJ ‘abruptly’ tightened policy on 31st July and signalled a more aggressive rate hike path than market may have anticipated. The rate hike triggered a three-day drop in export-heavy Japanese stocks, a jump in the Yen, and a quick unwinding of the so-called carry trade, dragging down risk assets globally.

On Thursday (8th August), the BOJ July MPM summary (minutes) said:

·         One monetary policy board member suggested the neutral rate is at least 1%

·         Member urges timely rate hike to avoid the need for rapid hikes

·         Expect a small hike to have no tightening effect

·         Sees little evidence confirming sustainable growth

·         Reaffirms commitment to ease monetary policy despite interest rate hike to 0.25%

·         Interest Rate at 0.25% Still Extremely Loose

·         Normalization should not be the sole objective

·         Calls for monitoring data to assess impact on wage gains

·         Suggests neutral rate is at least 1%

·         Sees prices and growth developing in line with the outlook

Conclusion:

Despite the unexpected/unthinkable BOJ tightening/gradual normalization, there is a huge policy divergence between the Fed and BOJ. If we adjust the average core inflation, the real U.S. /Fed repo rate is now around +1.90% against BOJ/Japan’s -3.00%. Also, BOJ is still doing QE (with some tapering), while the Fed is on QT (with some tapering). This is causing huge JPY depreciation against USD and even EUR, and GBP, causing a vitreous cycle of higher imported inflation and stagflation despite the advantage in exports. Also, geopolitical tensions with Russia and China are causing significant supply chain disruptions in Japan, causing more imbalances between demand and constrained supply.

As per Taylor’s rule, for Japan:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(4.00-2.00) =0+2+2=4.00%

Here:

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation=4.00% (2023 average)

As per Taylor’s rule, Japan’s repo rate should be around 4.00% instead of the present +0.50%. Even if we assume a potential output growth gap of around -1%, Japan’s repo rate should be around +3.00% in the long run (by 2025-26); although BOJ thinks at present there is no output gap and the Japanese economy is now growing as per its potential +2% almost around +1.9% in 2023.

Normally, a Central Bank should do its job to bring down inflation/ensure price stability by hiking rates into the restrictive zone (real positive rate) so that the resultant higher borrowing costs curtail demand/consumer spending, corporate and even government spending; i.e. creating some slack and allowing constrained supply side of the economy to match lower demand, and ultimately inflation normalizes/falls. This is exactly what is being done by the Fed, ECB, BOE, and almost all other G20 central banks, where core inflation is still running hot.

A central bank (monetary authority) has policy tools that may affect only the demand side of the inflation equation, while fiscal authority (governments) has policy tools not only for the supply side but also for the demand side through various policies and targeted fiscal stimulus (grants/subsidies). For effective inflation management, both monetary and fiscal authorities should act/coordinate effectively.

But despite that BOJ/Japan Government is not ready to hike or even normalize/exit the current ultra-easy monetary policy as Japan is the only among few major economies in G10, that is paying around 12-15% consistently of its tax revenue as interest on a huge public debt against U.S. 15% and EU/China’s 5.5%, far ahead of the AEs, which is a red flag and thus despite various narratives, BOJ is not in a position to normalize policy rate even after core inflation jumped to above +4.0% in May’23; BOJ is consistently referring elevated inflation post-COVID, primarily due to higher USD, higher imported inflation and lower supply.

Japan/BOJ has no option but to keep the bond yield/coupon rate at an artificially ultra-low level to keep borrowing costs minimal, so that it does not go above the 15% of the revenue red line. Japan/BOJ improved the borrowing cost ratio to 11.67% in FY22 from 13.50% in FY21 (due to improved revenue). BOJ now holds almost 50% of the total JP public debt.

But decades of artificially lower bond yield environment are also weakening Japan’s bank & financials, wage growths, and overall consumer spending. Japan is now in a deflationary to a stagflationary cycle. If core inflation continues to surge and becomes sticky/elevated around 5%, then BOJ’s ultra-easy monetary policy may cause more devaluation for the currency/Yen and cause more imported inflation, everything being equal (despite BOJ/Japanese government jawboning that they are ‘watching’ Yen movement). The never-ending deficit, debt, and devaluation are affecting the Japanese economy despite higher USD, favorable for any export-heavy economy.

In Mar’24, the BOJ normalized its symbolic special reverse repo rate of -0.10% to +0.10% without and repo rate hike and quitting JGB buying (QE). Looking ahead, BOJ may start hiking the repo rate, presently at +0.50% in H2CY24 by +25 bps to match possible Fed action when the Fed starts to cut from Dec’24, which will cause lower policy differential, lower USDJPY, lower imported inflation, higher JGB bond yields, higher NIM/NII for banks & financials and higher wage growths and an end of the vicious cycle of deflation (?). But looking into the B/S of BOJ and Fed, the policy differential is still huge as the Fed is in now QT mode, while BOJ is still in QE mode, having a repo rate of +0.50% against the Fed’s +5.50%.

Although, BOJ was famous for its negative interest rate policy (NIRP) narrative (bluff), in reality, the effective reverse repo rate was already around 0% or +0.10% in Mar’24, while the repo rate was +0.30% and no banks ever make the ‘complementary deposit’ above a certain limit in a special current account with BOJ, so that it has to pay an interest of +0.10% to BOJ under reverse repo rather than the usual opposite.

BOJ’s repo rate is now +0.50% from Aug’24 (from +0.30% since Dec’2008) against the Fed’s current rate of +5.50% and ECB’s +4.50% despite comparable core CPI; BOJ was trying to keep the 10YJGB bond yield at minimum levels, now around +1.0% by sheer jawboning and a false perception of a negative interest rate; in reality, BOJ’s repo rate was +0.30% till July’24 against Fed’s +5.50%, while the long term reverse repo rate +0.80% against Fed’s +5.40%.

Overall USDJPY was under stress after the ‘unthinkable’ BOJ tightening. Looking ahead BOJ may gradually hike rates by +0.25% every QTR from Dec’24 in line with Fed’s -25 bps cut; BOJ may hike +100 bps in 2025 and 2026 for a repo rate +2.75% against Fed’s +3.25% repo rate (longer term terminal rate); BOJ may also maintain around +1.00% real positive rate from average inflation/Core CPI (1.75-2.00%).

Possible Market Impact:

If BOJ indeed goes for rate hikes, while the Fed goes for rate cuts and keeps the repo rate at +2.75% against the Fed’s +3.25%, USDJPY may fall to around 125-120 levels with an upper range of 140-145; higher USDJPY may be negative for Japanese stocks, so-called global carry trade, but should be positive to some extent for export heavy US MNC/Techs (lower USD).

Weekly-Technical trading levels: USDJPY

Whatever the narrative, technically USDJPY (146.50) now has to sustain over 145.00 for a rebound to 148.00/149.00-151.00/153.50 and further to 154.50/155.50-156.50/157.50 and 160.00/162.00-153.00/165.00 in the coming days; otherwise sustaining below 144.50-144.00, may again fall to 143.00/141.00-140.00/137.00 and 134.00/130.00-127.00/126.00 and 122.00-120.00 in the coming days.