EWJV - The Last ZIRP Man Standing
2023-08-01 04:30:00 ET
Summary
- The BOJ now has to try to slowly normalize monetary policy.
- The yen was the original carry trade currency.
- China is a bigger export market for Japan than the U.S.
Zero Interest Rate Policy (ZIRP) and quantitative easing (QE) - the two major unorthodox monetary policies of the last two decades - were both born in Japan. QE began there in 1998, with little success, and soon thereafter the BOJ was the first major central bank to take its policy rate close to zero, yet Japan is now the last major central bank to be slowly moving away from the zero-interest-rate cellar.
To be fair, the BOJ's policy rate (the equivalent of the U.S. fed funds rate) is still -0.1%. But last week the BOJ let the 10-year JGB move above 0.5%, in effect altering its policy of yield curve control, saying it may let it go as high as 1%, keeping its threat to intervene at any time.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The BOJ now has to try to slowly normalize monetary policy, as the Japanese inflation rate is at 3.3%, at last count, with the core inflation rate very closely correlated to the overall rate.
This is very different than the U.S., where the core rate is much higher than the overall inflation rate.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Why should investors care about any changes to the interest rate policy in Japan?
Last Thursday, as the U.S. got wind that yield curve control ((YCC)) policies in Japan are about to change, the S&P recorded what is known as an outside down day, selling off sharply. At first, the index registered a new high for 2023 at 4,607 and then sold off sharply in the afternoon to close below Wednesday's low.
While one day a trend does not make, such action typically indicates a change of trend. Such erratic trading warned investors to be on the lookout for a correction, most likely coming in the 50-day moving average. By the time the index gets there - if it falls that far - it should be around 4,400.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The yen was the original carry trade currency since its chronically low interest rates made it possible for institutional investors to borrow yen on the cheap at wholesale funding rates, then sell it for dollars, and then buy higher-yielding U.S. dollar-denominated assets, even Treasuries. Such "carry arbitrage" can be profitable even after trading and hedging costs, but should the Bank of Japan ever become serious about normalizing interest rates, the developed bond and stock markets should see quite the ripples.
The Bank of Japan is aware of the yen carry trade and is likely to move very slowly because of such anticipated ripples. We saw a preview of what can follow last Thursday as the BOJ began to move.
The Nikkei is Still Below Its All-Time High from Over 33 Years Ago
The 2023 high for the Nikkei is 33,800. The 1989 high was just shy of 40,000. For comparison, the Dow Industrials in December 1989 was around 2,750. It actually took the Dow less time to recapture a new high after the 1929 crash than what it is taking the Nikkei today to try to make it to its 1989 highs.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Can the Nikkei do it in 2023?
That all depends on where we come out on the soft vs. hard landing scenario in the U.S. and China, which is not performing very well economically of late. If China's economy deteriorates further, as it is the #1 trading partner of most Asian economies, it will be hard for them to sustain momentum.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
China is a bigger export market for Japan than the U.S., as is the case for many countries in the region, and one has to wonder what happens if the recession that has been threatened many times in China (but has not happened since 1993), ever arrives. Even the 1993 recession was not official and was scrubbed from the official statistics; but most China watchers agree that it occurred, which also led to a major renminbi devaluation, which later became the domino that began the Asian Currency Crisis of 1997.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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The Last ZIRP Man Standing