Japan Has Entered the Chat

Good afternoon,

The Bank of Japan is not here for Santa's hot girl winter. Meanwhile, the only thing higher than Argentina's odds of winning the World Cup is the inflation its citizens are now coming back down to earth to remember. Oh, and seemingly every British public servant and their local pub puppy is on strike.

Let’s dive in.

Bottom Line Up Front

• Nike's earnings are out after the close of trading today, and the stage is set for another potential retail disappointment (Yahoo)

• Epic Games to pay $520M to resolve FTC allegations that the Fortnite videogame developer violated online privacy protections for children and "tricked" players into making unintended purchases (WSJ)

• The CEO of the world’s largest Bitcoin fund, Grayscale Investments, still wants to convert it into an ETF (Barron's)

• Canada is set to seize $26M in sanctioned assets from former Chelsea FC owner...and Russian oligarch...Roman Abramovich (BBG)

• One for the lolz: Justin Bieber urged fans not to buy his own "trash" merch at H&M (Yahoo)

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Japan Trolls Every Bloomberg Economist

Another dove bit the dust. Last night, or afternoon for our investment bankers, the Bank of Japan announced it would loosen the shackles on its 10-year yield target.

A TL;DR if you’re trying to make sense of the “Japan broke the world” rants:

• The BOJ raised the cap on 10-year yield target from 0.25% to 0.5%

• This means higher borrowing costs for the Japanese government

• It will force bond yields and interest rates globally to be repriced

Let’s discuss how a minor policy tweak will have huge implications that will take weeks to play out.

Summarize currency traders on Twitter for me in 30 seconds

Will do. Bank of Japan Gov. Haruhiko Kuroda shocked markets by adjusting the central bank’s yield curve control program. This sparked a sharp rise in the yen. More, the news and fallout comes just months before Kuroda is due to step down.

The BOJ will now allow Japan’s 10-year bond yields to rise to around 0.5%, up from the previous upper limit of 0.25% on their range of movement. The central bank kept its target for the yield unchanged at around 0%. It also left its short-term interest rate at -0.1%.

So just how wrong were predictions?

More so than a girlfriend in PR trying to explain WACC. All 47 economists surveyed by Bloomberg expected no policy change. To be fair, most of them had said the bank should do more to improve the functioning of the bond market.

To make up for going 0/47, sensationalist notifications in the Bloomberg Terminal included:

• JAPAN 10-YEAR YIELD SOARS 20.5BPS TO 0.455%, HIGHEST SINCE 2015

• JAPAN BOND FUTURES TRADING HALTED: OSAKA EXCHANGE

• BOJ ANNOUNCES UNSCHEDULED BOND BUYING OPERATION

For context, in 2016, the BoJ started yield-curve-control with the 10-year Japanese government bonds (JGBs) at 0%. The gray area (below) is the acceptable band around 0% it will tolerate.

What now for Japanese bonds?

The JGB market was collapsing, and thus, the BOJ announced a bond-buying operation that, apparently, your neighborhood Bloomberg economist was too busy watching Messi highlights to pick up on. This naturally leads to the question: What is the fair value of the 10-year JGB?

The 10-swap rate might offer a clue. Now at 0.65%, it was becoming untenable to "force" 10-year JGBs to stay at 0.25%.

How will financial markets react?

The surprise decision has the potential to jolt global financial markets, as the BOJ’s steadfast commitment to defending its 10-year yield cap has served as an anchor. In other words, they’ve been the glue indirectly keeping borrowing costs low around the world.

Upon the announcement, the yen strengthened to as much as ¥133.21 against the dollar, compared with ¥137.16 immediately before the announcement.

In case you have images disabled in your browser (seriously? it's a memesletter), here’s a briefer on the above charts:

The dollar is getting crushed against the Yen. Or, if you need a break from all the clickbait you’ve read this morning on the situation: The Yen is soaring versus the dollar.

What now for Japan?

Japan is getting a yield again. That should drive funds back into Japan.

A further firming of the yen would help reduce the cost-push inflation that is weighing on domestic-oriented businesses and households. This news comes months before Prime Minister Fumio Kishida picks Kuroda’s successor.

Governor Kuroda had repeatedly stuck to a resolutely dovish stance by stressing the need for stimulus until there is stronger wage growth. Throughout Powell’s “transitory” and “soft” phases, Kuroda ruled out the possibility that the BOJ would take action against the yen’s slump.

Speculation had been growing in the run-up to the BOJ gathering over the likely direction of policy after Kuroda steps down. Now, Kuroda has taken the first step for them.

So, let’s recap:

• Kuroda and the BoJ are making money moves over inflation

• ECB head Legarde is now talking hawkish

• Powell is hawkish

Markets may want to rethink their view about central banks pivoting earlier than it takes for your Uber to reach you during surge pricing.

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