There have even been rumors that the BOJ might hold an emergency meeting on Monday as it scrambles to defend its new yield cap in the face of a sell-off.
The markets were therefore anxious and the Japanese Nikkei lost 0.9% at the start of the session.
MSCI’s broadest index of Asia-Pacific stocks outside Japan edged up 0.2% as hopes of a quick reopening in China lifted it 4.2% last week. .
S&P 500 and Nasdaq futures both fell 0.1% following Wall Street rallied last week.
Earnings season is picking up speed this week, with Goldman Sachs, Morgan Stanley and tech’s first big name, Netflix, among others.
Top world leaders, policy makers and business leaders will attend the World Economic Forum in Davos and many central bankers will speak, including no less than nine members of the US Federal Reserve.
The BOJ’s official two-day meeting ends on Wednesday and speculation is rife that it will need to make changes to its Yield Curve Control (YCC) policy given that the market had pushed rates to 10 years above its new ceiling of 0.5%.
The BOJ bought nearly 5 trillion yen ($39.12 billion) in bonds on Friday in its biggest daily deal on record, but yields still ended the session up 0.51% .
However, it tried to get ahead of the speculative sellers by announcing that it would conduct another emergency round today, suggesting that it was determined to defend its yield policy, at least for now.
“There is always the possibility that market pressure will force the BOJ to further adjust or exit the YCC,” JPMorgan analysts said in a note. “We can’t discount that possibility, but at this stage we don’t see it as a main storyline.”
“Although domestic demand has started to recover and inflation continues to rise, the economy is not warming to the point where it can tolerate a sharp rise in interest rates and a potential risk of strong yen appreciation” , they added. “As such, we believe the economic environment does not strongly support consequential policy changes.”
NON-ANK YEN
The BOJ’s ultra-easing policy acted as something of an anchor for yields around the world, while dragging the yen lower. Abandoning this policy would put upward pressure on developed market yields and likely see the yen surge.
The dollar is already at its lowest level since May, 128.03 yen, following losing 3.2% last week, and threatens to break the major support around 126.37.
The euro was also down 1.5% once morest the yen last week, but was helped by gains on a much weaker dollar that took it to $1.0826 on Monday, just off a nine-month high.
The dollar was undermined by falling US bond yields, with the market betting that the Federal Reserve may be less aggressive in raising rates as inflation has clearly turned the corner.
Futures now imply that there is almost no chance of the Fed raising rates by half a point in February, with a quarter-point move considered a 94% chance.
Yields on 10-year Treasury bills are down 3.51%, following falling 6 basis points last week to approach their December low, and major chart target, of 3.402%.
Alan Ruskin, global head of G10 FX strategy at Deutsche Securities, said the loosening of global supply bottlenecks in recent months has proven to be a disinflationary shock that increases the chances of a landing. gently for the American economy.
“Lower inflation itself encourages a soft landing through real wage gains, making it easier for the Fed to pause and encouraging a better-behaving bond market, with favorable spillovers to financial terms,” Ruskin said.
“A soft landing also reduces the tail risk of much higher US rates, and this reduction in risk premia supports global risk appetite.”
Falling yields and the dollar benefited gold, which jumped 2.9% last week to its highest level since April and was last trading at $1,918 an ounce. [GOL/]
Oil prices also rose last week on hopes that China’s rapid reopening will boost demand. Mobility, traffic and transport travel data in China showed a strong upturn in movement ahead of the Lunar New Year holiday next week. [O/R]
Chinese data on economic growth, retail sales and industrial production expected this week will certainly be grim, but beyond that markets are likely to see a quick recovery now that coronavirus restrictions have been lifted.
Early Monday, Brent was up 8 cents to $85.36 a barrel, while US crude rose 10 cents to $79.96.
($1 = 127.8000 yen)