Bank of Japan does little and sees less
Without triggering a similar epileptic fit, the Bank of Japan have committed themselves to a Swiss-style floor in Japanese bond yields in a fresh effort to drive inflation higher in the country. Japanese debt due in 10 years cannot now sell with a yield lower than 0% – in effect the Bank of Japan is backstopping the market – in a bid to take some of the debt driven investment flows out of the economy and drive the money somewhere else.
The Bank of Japan has also pledged to continue buying assets until inflation “exceeds the price stability target of 2 per cent and stays above the target in a stable manner”. As we contested with the Reserve Bank of Australia yesterday, it is all well and good saying that you are going to hit your target but if you’ve been saying that for 5 or more years and you haven’t got anywhere close than we have to express some incredulity. I am committed to overshoot my weight loss target but that still means I’ve got to do a few sit-up now and again; something has to change more than tinkering around the edges.
Long road to travel
If it does work then lower real rates will start to be seen in an economy that has suffered deflationary pressures for the past 25 years and a devalued currency – the Bank of Japan’s end game – will make paying back these loans easier. There is a long way to travel before that intent becomes an impact and communication of this to the Japanese consumer is key.
Yen has weakened on the announcement although not drastically and would need the Federal Reserve to weigh in with a hike tonight for USD/JPY to really want to take a leg higher.
Fed to hold as caution reigns
As we have written many times this year, the Federal Reserve is a nervous beast and this Federal Reserve even more so. Market and investor opinion is not with a hike today – current implied probabilities are sat at 22% – and this Fed Chair is not one to go out there and surprise markets.
Growth remains less than 2% on the year, inflation is building but policymakers seemed fixated on the negative impact of oil price falls in the past 24 months or so. The jobs market is strong but productivity remains poor, and the consumer continues to spend.
A rate hike is coming, on that I have no doubt – I think calls for a one-and-done policy move from the Fed are overly pessimistic – but to raise rates this close to an election this divisive would be a very strange move from an extremely cautious set of central bankers.
Within the press conference and the release of the dot plots that graph the FOMC’s views on where rates will be in the coming 12 months we expect that they will be looking for on average 3 hikes.
The Fed decision is at 7pm with Janet Yellen’s press conference half an hour later.
Saunders hints at further easing from BOE
Elsewhere, the newest member of the Monetary Policy Committee Michael Saunders has been sounding cautious but positive in the Financial Times. He believes that the UK economy will see a dip in growth in the coming years but beat the consensus of City economists of which he used to be a member of.
Sterling dipped below the 1.30 level versus the USD yesterday and there will likely remain some USD strength into the Fed meeting at 7pm. There was little to drive this fall in sterling but Brexit-facing uncertainty cannot be far from investors’ minds.