Late in December, the Bank of Japan announced, unexpectedly, that it was adjusting its policy for buying bonds. Even something as vague as that is enough to rattle financial markets because Japan is the world’s largest creditor. At the end of 2021, it held roughly $3.2 trillion in foreign assets, 30? more than No. 2 Germany. As of October, it owned over a trillion dollars of U.S. government debt, more than China. Japanese banks are the world’s largest cross-border lenders, with nearly $4.8 trillion in claims in other countries. The policy change was relatively minor–a decision to raise the ceiling on yields for the 10-year bond. But global bond markets have been waiting for any signs that say the days of 0% (or lower) bond yields in Japan might be coming to an end.
It’s certainly a novel take on fighting inflation. On Thursday, the government of Japan announced $197 billion in new stimulus spending. And the Bank of Japan said it has no plans for an early increase in interest rates. The overnight interest rate at the Bank of Japan is at negative 0.1% and the bn k continues to keep the yield on the 10-year bond at 0%. This isn’t the traditional way to fight inflation, which in September ran at 3% in Japan.
Trick or Trend: The dollar came back strong on Friday–Expect problems in the currency markets (especially the Yen) this week
The dollar broke back STRONG on Friday with, for example, the Invesco DB U.S.Dollar Index Bullish Fund ETF (UUP) gaining 0.69% on the day after dropping 0.66% during the Thursday, October 13, stock rally. Looking at the overnight markets in Asia on Sunday, October 16, it looks like U.S. traders and investors can expect more dollar strength to begin this week. And this is starting to become a big enough problem that it’s adding volatility to the financial markets in general.
Trick or trend: Will the Bank of Japan and the European Central Bank raise rates enough this week to slow the dollar? Nah!
The dollar is likely to get another boost from the Bank of Japan and the European Central Bank this week. On Thursday, the European Central Bank is likely to report its first interest-rate increase in more than a decade. But the increase is likely to be just 25 basis points. That will be a stark reminder of how far behind the Federal Reserve, which raised interest rates 75 basis points in June and is expected to increase rates by another 75 basis points at its July 27 meeting. On Thursday the Bank of Japan is expected to keep its benchmark interest rates at its current low, low, low level.