Real yields in the US converge around 2.5%. Against this backdrop the policy mix in Japan remains untenable. The reaction to the change in the BoJ’s YCC was telling. The yen weakened past 151 against the dollar, as bets ramp up against the currency. The trade-weighted yen slid to a new multi-decade low. It should be noted: the current account surplus in Japan was 4.0% of GDP in Q2. Exports jumped 7.2% m/m to a record in September too (nominal terms). Ultimately, monetary policy in Japan remains too far out of kilter with the economy/inflation. The current account surplus exacerbates the risks of a big yen repatriation, when the BoJ is eventually forced to hike cash rates.
For now, letting the 10-year JGB yield rise towards 1% is simply not enough to support the yen, when underlying inflation is at least 2%. The jump in the Tokyo recreation services CPI in October (+9.3% y/y), is one channel through which a weaker yen is contributing to stronger inflation prints: hotel prices surged 42.9% y/y, with inbound tourism spending very strong. Raising rates would be a more expedient way to support the yen and keep a lid on imported inflation. If it is perceived that the BoJ can’t hike rates, because of the size of its public debt burden, whilst at the same time Kishida pushes through income tax cuts, the yen will continue to weaken.
China has lifted its 2023 budget deficit target, from 3.0% to 3.8%. The pressures on public debt burdens, globally, will continue to grow. The new debt raised will go towards supporting infrastructure rebuilding and improving resilience in areas affected by this year’s natural catastrophes. China is heavily impacted by climate change, and there is a risk here of a negative feedback loop: CGB yields have been climbing. The deterioration in China’s public finances, could push up CGB yields further, putting additional pressure on the property market. This in turn could continue to weigh on Chinese stocks and the RMB, exacerbating the capital outflows.
