A day full of variables!
The Bank of Japan issued a statement at the end of its two-day policy meeting in March, stating that it will raise short-term interest rates from -0.1% to around 0% to 0.1%. The Bank of Japan has also abolished its aggressive yield curve control policy on Japanese sovereign bonds, which is a policy of the Bank of Japan to achieve long-term interest rate targets by buying and selling bonds when necessary. Subsequently, major Japanese banks are considering raising savings deposit interest rates. This is Japan's first interest rate hike since 2007.
The actions of the Bank of Japan were actually anticipated by the market earlier. But what was not expected was that the Japanese stock market rose, the US dollar surged, and the Japanese yen plummeted significantly. At the same time, the market in Greater China has also been significantly affected, with northbound funds ending their continuous net inflows today and turning into net outflows, with a significant magnitude.
So, what kind of impact will this have on the market?
An unexpected scene
The Bank of Japan (BoJ) announced on the 19th that it would raise interest rates for the first time since 2007 and cancel the treasury bond yield curve control (YCC) policy. The initial signs of strong salary growth this year prompted the BoJ to end the last negative interest rate policy in the world.
At the end of the two-day policy meeting, the Bank of Japan issued a statement, raising the short-term interest rate from -0.1% to about 0% to 0.1%, and announced the cancellation of the control policy on the yield curve of 10-year Japanese treasury bond, that is, guiding long-term interest rates by buying and selling bonds.
Although core inflation (excluding food and energy prices) has exceeded its target of 2% for over a year, the Bank of Japan has hardly changed its ultra loose monetary policy stance, as policymakers believe that price increases are mainly input driven.
The Governor of the Bank of Japan has repeatedly stated that the outcome of this year's annual "spring battle" wage negotiations will be the key to sustainable price increases. The Bank of Japan predicts that wage increases will lead to a virtuous cycle, with domestic demand driving inflation. The Bank of Japan stated in a statement that "service prices continue to rise moderately, partly due to mild wage increases so far." Bank of Japan Governor Kazuo Ueda stated that he does not expect deposit and loan rates to rise sharply after today's decision, and loose conditions will strongly support the economy and prices. If necessary, options for comprehensive easing will be considered, including those used in the past.
In fact, the Bank of Japan's interest rate hike has already done a lot of expectation management and laid a lot of groundwork. In theory, this is no longer news. However, an unexpected scene still appeared. After the Bank of Japan raised interest rates, the expected scenario did not occur: the yen did not appreciate, but instead plummeted; The US dollar has not fallen, and the Japanese stock market has not fallen either. The yield on US bonds has not fluctuated significantly, which means that funds have not flowed out of the US bond market significantly. Then, the market in Greater China was clearly impacted, with an increase in capital outflows from the north. The South Korean stock market also experienced a significant drop.
So, what exactly is the reason for the currency market to go so far? Analysts believe that it may still be related to the strategy adopted by the Bank of Japan. At the same time as raising interest rates, the Bank of Japan warned that due to the fragile growth of the world's fourth largest economy, it "expects loose financial conditions to be temporarily maintained" and will not raise interest rates significantly. The Bank of Japan will continue to purchase approximately the same amount of government bonds as before - currently around 6 trillion yen per month. If long-term interest rates rise rapidly, it will take "flexible response", including increasing the purchase of Japanese treasury bond and buying Japanese treasury bond at fixed interest rates.
The Bank of Japan has reduced its aggressive asset purchases and quantitative easing policies, stating that it will stop purchasing exchange traded funds and Japan Real Estate Investment Trusts (J-REITs). We also promise to gradually reduce the purchase of commercial paper and corporate bonds, with the goal of stopping this practice within approximately one year.
During an interview with a Chinese journalist from a securities firm, Jiasheng Group stated that all changes will be gradual and that the cautious Bank of Japan will not suddenly interrupt its policies. The Bank of Japan will not directly initiate a tightening cycle at this time, and any rate hikes will be highly dependent on data. At present, the Bank of Japan is only withdrawing from negative interest rates. It is difficult for the Bank of Japan to continue to raise interest rates until 2025. If the data continues to improve, the interest rate may slowly move to 1%. However, this year, it is difficult for the yield of Japanese 10-year treasury bond bonds to exceed 1%, and the interest rate gap between Japan and the United States is still large.
Previously, the Bank of Japan has twice relaxed the range controlled by the yield curve, but after easing to plus or minus 1%, the yield of Japanese treasury bond bonds has never touched the upper limit of the range. We still hold a positive attitude towards the overall Japanese stock market. Last year, the inflow of funds into the Japanese stock market was mainly from international investors, and this year this inflow will continue. The institution also expects more local Japanese investors to consider entering the stock market layout. Another factor to closely monitor is that the Federal Reserve seems determined to start slowing down the pace of balance sheet contraction as soon as possible, so it is not surprising if Powell and his team propose a clear plan this week to gradually slow down the pace of balance sheet contraction starting from the second quarter. Until at least June, any form of interest rate cut seems unlikely, so Powell and his team may propose this adjustment as a symbol of "loose" policy before making a decision on interest rates.
Key Impact
In fact, the key market shock still lies in the US dollar. Today, the US dollar index continued to rise, but the US bond yield did not move much. This means that after Japan raised interest rates, funds did not withdraw on a large scale from the US market.
However, the impact of the rise in the US dollar on the market is evident. Today, the A-share market has clearly been affected by peripheral factors. The market with relatively good morning performance began to weaken towards the morning close, and individual stocks continued to weaken in the afternoon. More importantly, foreign investment increased its selling power today, with the maximum net selling exceeding 5.7 billion yuan at one point. This deviates from the recent trend of net inflows of foreign investment.
From a historical perspective, the sustained rise of the US dollar index will exert certain pressure on the equity market. This means a decrease in offshore US dollar supply, and foreign investment will also flow out of the equity market as a result. In addition, the Guotai Junan Research Report stated that the two sessions' reports tend to focus more on "major strategic implementation and capacity building in key security areas" for the arrangement of active fiscal policies, rather than the repair of traditional investment and consumption balance sheets and cash flow creation. This is lower than the market's optimistic expectations and the ability to improve overall ROE growth, so the upper limit of the index rebound is not high. After falling behind in policy expectations during the two sessions, investors will welcome the "April decision" and face the verification of economic data and corporate performance. From the current perspective, the resumption of major projects after the holiday and the labor force employment rate are significantly lower than previous years, and the post holiday "enterprise recruitment willingness" is also lower than previous years, indicating that the overall demand expansion momentum is insufficient and the expected market is entering a volatile stage.
It is worth mentioning that the South Korean stock market has also been affected. The South Korean Composite Stock Price Index (KOSPI) fell more than 14% at one point this year, as funds in the country sold off technology stocks and some stocks that had previously surged due to government push for corporate reform expectations. So far, domestic funds have sold a net 153 billion Korean won worth of stocks, and foreign funds are also selling. Retail investors are net buyers. Samsung, SK Hynix, and Kia were the most dragged down by the decline in KOSPI.
Analysts believe that from the market in 2021, that wave of market trends was driven by Tesla and triggered a collective explosion in the new energy industry chain. However, it should also be noted that at that time, the US dollar was still expanding, so the non-ferrous sector also performed very strongly. Nowadays, this trend is driven by Nvidia, but the overall increase in the industrial chain is not as significant as that of the new energy industry chain, mainly due to the current period of US dollar contraction. Although the market expects a US dollar interest rate cut, it has not yet arrived. Only by lowering interest rates in the US dollar and ending quantitative tightening can the global equity market truly benefit.
