All might not be the same as the Bank of Japan might end up stealing the Fed’s grip come Wednesday.
Possibly a twisting time for Kuroda
The Federal Reserve will be meeting as from Wednesday until Thursday and will embark on a rate-setting exercise. While this exercise remains the main market driver for the U.S. financial markets, it is the Kuroda’s team from Tokyo that might end up stirring the asset prices next week.
“Financial markets are now in a dangerous place, worrying of the meetings from Tokyo (BOJ) and Washington (FOMC),” a CMC Markets official noted.
Fed remains a primary market driver in the U.S.
The ever changing expectations of the Fed’s timing for a rate increase have driven the global market’s short end while the expectations rallied on the BOJ and the prospects placed on the QE have fuelled the long end.
Numerous central bank watchers are focusing on the Bank of Japan for quite a number of reasons.
The BOJ has proved to be the most aggressive major central bank dealing with QE (Quantitative Easing). It has always focused on reflating the Japan’s economy with its negative interest rates, bond programs and asset purchases.
Recently, it has been noted that aggressive quantitative easing by major central banks including Bank of Japan and European Central Bank has made this banks incur diminishing returns.
Critics show that the difference between the long and short-dated government bonds and the negative interest rates have resulted to poor performance among these banks. The fear lies on the very low and negative rates that these banks have generated making businesses and consumers to hoard cash.
The Japanese yen has failed to weaken in the face of these negative rates as everyone would expect. A weak Japanese currency has been able to make Japanese exports competitive in the global market has allowed Japan to transmits its monetary stimulus to the economy. The yen has seen a tremendous rise compared to its counterparts in the current year; it has seen a 15 per cent rise against the euro and 18 per cent rise against the dollar.
Governor Haruhiko Kuroda of Bank of Japan ordered a comprehensive review of the central bank – a move that surprised investors while leaving economists think that doubts on the effectiveness of the quantitative easing were emerging. The review will be made public later this week.
Various reports points to a direction where the board of the Bank of Japan are supporting the ultra-easy monetary policy, but remain doubting the best way to approach the situation as the banking sector in the country feels the hit of a flat yield curve as well as low rates.
Various players in the market have mounted speculations that the Bank of Japan may carry out an ‘inverse twist’ that will see the bond purchases shift away from the long end the yield curve. This will be a replica of the Federal Reserve option where they adopted ‘Operation Twist’ in 2011 and 1961; where the central bank sold short term debt and bought long term debt to flatten the yield curve.
Steve Barrow from Standard Bank noted that the fear surrounding the selling pressure at the long end of the Japanese bond market may escalate.
With that among the core reasons for the weaker government bonds in the past few weeks, many market analysts remain doubtful that a bond market rout is imminent.
However, there still exists some hope for the BOJ to ensure that Yellen and other policy makers in Washington will have something to discuss in the Wednesday meeting.
“For sure, The Bank of Japan is the crucial determinant for the direction the market is moving despite a record of failing to keep up with the expectations,” one official stated at an event held in New York Stock Exchange.
Then, if the Bank of Japan had to part with history and resolve to work on doing away with the quantitative easing to facilitate a steeper curve, the bear steepener in the market will be forced to join with the Treasury.