The new UK Chancellor will have assuaged markets somewhat today, scrapping the bulk of Kwasi Kwarteng’s tax cuts, and announcing a significant reduction in the energy price guarantee. But the (delayed) reaction of the US Treasury market to Thursday’s CPI report is arguably more important. US Treasury yields reached new cyclical highs across the curve at the end of last week.
Markets have forced the UK to chart a course for fiscal sustainability. The same is happening in Japan. The sell-off in Japanese assets has obviously not been as violent, but the yen has fallen past 148 against the dollar (approaching 149), with 20-, 30- and 40-year JGB yields all reaching secular highs this morning.
The story has largely played out as expected: it may still be too soon to say these trades have run their course. October was always going to provide the biggest test yet, due to the sheer number of pre-announced price hikes in Japan set for this month.
Sure enough, the y/y for the SRI-Hitotsubashi Consumer-purchase Price Index (ex-cigarettes) surged from 2.54% at the end of last month to 3.71% in the week beginning October 3rd. Kuroda’s view, that the BoJ’s ultra-loose monetary policies are justified because headline inflation is set to fall below 2% next fiscal year, is beginning to look reckless, given the stronger core inflation prints and the October surge in food prices.
The BoJ is completely out of sync with the global monetary cycle. So far, the Ministry of Finance has been able to bear the yen’s depreciation, with only relatively modest FX intervention, and the BoJ has not had to abandon its yield target. But the inflation data out this morning suggest more FX intervention will be required, which will trigger even greater scrutiny of the BoJ’s policies.
