Ear to the Ground

January 20 2023


We start in the east this week, Japan in particular, where we had a number of announcements.  Firstly, we had the Bank of Japan meet to decide on the level of interest rates.  Here the decision was made to keep the rate on hold at -0.1%, which was in line with market expectations.  There was a surprise however for the market to absorb, in that they decided not to change their yield curve control measures.  Given the rise in inflation, confirmed as running at 4% year on year later in the week, there were expectations that these measures would be further relaxed, as they were in December. 


With the 10 year Japanese Government Bond (JGB) yield having continued to push against the 0.5% level, it is reported by the FT that the Bank of Japan has spent around 34 trillion yen (c. $265bn) on bond purchases since the last time it met on the 20 December.  The Bank of Japan currently has a target yield of 0% with a permitted range of plus or minus 0.5%.  The yen initially fell sharply on the news, but by the end of the session had recovered its losses.  Still, the yen remains at a 51 year low.


The key question moving forward is for how long this policy can be maintained.  Market commentators are increasing of the belief that it has become unsustainable and that we will see that banding increased further, or even abolished altogether.  Such a move is likely to see interest rates rise also and therefore potentially lead to yen appreciation against other currencies.  This move could coincide with the appointment of a new central bank governor in April.


In the UK, meanwhile, the market was, surprise, surprise, focussed on inflation, with key data releases seen.  Firstly we had CPI, which came in, as expected, at 10.5%.  This was the second consecutive month of slowing inflation, prompting the Bank of England governor, Andrew Bailey, to believe that a “corner has been turned.”  Still, the turndown in the inflation rate is not yet to the same extent as that seen elsewhere, such as the US.


He did, however, continue to warn that the labour market remains tight.  A keen eye, therefore, will be kept on what level of pay negotiations are agreed with the many workers currently striking, along with those who aren’t in the private sector but are demanding more reward for their endeavors.  Average earnings figures were also released, posting a year on year rise of 6.4% (including bonuses), above consensus expectations of a 6.2% rise.  The potential that the US Federal Reserve may reach peak rates before the UK, due to the data we are currently seeing, is perhaps the reason why we have seen a convergence in 10 year government bond yields, with the US yielding 3.47% and the UK 3.34% at the time of writing.


To end we head east again, in particular China.  Whilst the newspapers focus on the number of cases and unfortunate level of hospitalisations and deaths, the markets are focussing on the relaxation of movement and Covid restrictions.  Having seen already what this meant for the west, they are now hopeful that they could see something similar in China, which would not only benefit the country but the wider Asian region.  Figures show that Chinese subway traffic has picked up sharply, mainland domestic flight cancellations have declined sharply, whilst flights to Europe also continue to rise.  In what is the lunar year of the rabbit in China, let us hope that the economy and markets here can continue to bound on.

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