Globally, governments continue to defer the tough political choices when it comes to balancing the books.
On the December 23rd, the Kishida administration revealed a record Y114.4tr ($863bn) budget for the next fiscal year from April (i.e. FY23), boosted by increased military spending and higher social security costs. Kishida’s proposed tax hike to fund the increase in defence spending has been shelved for now, after resistance by some LDP lawmakers.
The BoJ has had to increase its pace of bond purchases to maintain its new yield cap (0.5%), announcing an unprecedented third day of unscheduled bond purchases on December 30th. Bond-buying in December totalled ¥17 trillion ($128 billion), a new monthly record.
In the Eurozone too, governments continue to spend heavily to tackle the energy crisis and to finance the green transition.
The ECB will embark on QT this year. But this comes at an inauspicious time: the German bund sell-off has accelerated. In addition, the German Finance Agency plans to issue a record amount of debt in 2023 (€539bn), compared to €449bn in 2022, and €483bn in 2021 (the previous peak).
The time to unwind QE is when debt as a share of GDP is on a sustainable trajectory and falling. Embarking on QT when governments have failed to get a firm grip on spending spells trouble and is a recipe for a further rise in sovereign bond yields in 2023.
After last year’s historic bond sell-off, 2023 promises more volatility. Markets will have to navigate QT in 2023: this will not be straightforward. This will not be constructive for equities.
