BOJ Rate Hike More Likely in January
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As Japan enters 2024, it finds itself mired in a convoluted policy dilemma known as the "impossible trinity" or "trilemma." This economic theory posits that a country cannot simultaneously maintain a stable currency, independent monetary policy, and free capital flowIn the case of Japan, capital outflows are intensifying, while the Bank of Japan (BoJ) maintains a dovish stance, resulting in a depreciation of the yen that is increasingly difficult to predict.
According to a report from Bank of America on January 9, Japan is currently caught in this trilemmaThe implementation of the NISA (Nippon Individual Savings Account) policy at the start of 2024 has accelerated capital outflows, and the BoJ's gradual approach to normalizing monetary policy has further exacerbated the situationAs a result, the yen is projected to be the worst-performing currency among the G10 in 2024.
The specific challenges faced by the yen are compounded by new records in retail capital outflows
In January alone, net investments from Japanese retail investors into foreign equities reached approximately 600 billion yen, marking the fastest monthly growth in historyOn January 8, a single-day inflow reached around 400 billion yen, breaking previous recordsThis surge in investment can be attributed to retail investors attempting to maximize their annual NISA contributions, leveraging tax incentives offered by the Japanese government.
This rapid capital outflow reflects the efforts of Japanese households to safeguard their wealth against rising domestic inflation and currency depreciationBy diversifying investments, they aim to mitigate the risks posed by emerging inflation trends and the declining yen.
Meanwhile, the Bank of Japan's decision to maintain its dovish stance has had significant repercussionsFollowing the BoJ's December meeting, Bank of America pushed back its expectations for a rate hike from January to March
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The remarks made by BoJ Governor Kazuo Ueda when the USD/JPY exchange rate exceeded 155 came as a surprise to markets, indicating that the BoJ was not overly concerned about the yen's depreciationThis interpretation led many to believe that the BoJ prioritizes stability in the interest rate and equity markets over the foreign exchange market.
The combination of accelerated capital outflows and the BoJ's dovish position has caused a disparity in market pricing regarding the upcoming monetary policy meeting on January 23-24. With the market assigning less than a 50% probability to a potential rate hike in January, there is an increasing expectation that a substantial rise in USD/JPY could prompt a reaction from the BoJIf the exchange rate were to rise significantly beyond 160, the probability of a rate hike could exceed 55%.
Bank of America further predicts that USD/JPY will continue to rise and become more unpredictable, as the threshold for currency market intervention appears to be shifting
This uncertainty arises from a number of factorsFirst, governance appears unstable, with the government led by Shigeru Ishiba, which is supported by a parliamentary minority coalition, lacking a coherent stance on monetary policy.
Additionally, the unpredictability of policy in the United States under a new administration complicates mattersWithout clarity on U.Spolicy, Japanese policymakers may find it difficult to preemptively intervene in financial markets.
The market is reevaluating the BoJ's policy response mechanism, adding further uncertaintyAs a result, even though the threshold for currency intervention remains unclear, market speculation about potential BoJ responses may heighten if USD/JPY exceeds 160. Subsequent surges beyond the 162 mark could lead to even larger market fluctuations.
It is posited by analysts that if the USD/JPY surpasses 160, the likelihood of an interest rate hike could indeed exceed 55%. This movement may also correct some of the recent steep increases observed in the yields of ten-year Japanese government bonds.
Currently, market participants are closely watching the BoJ's monetary policy meeting in January, and several major events are lined up before this pivotal gathering
