Bank of Japan countdown almost over

Dec 19 – The Bank of Japan’s policy decision and subsequent remarks from Governor Kazuo Ueda will dominate Asian markets on Tuesday and maybe give investors an insight into how wide the divergence will be between the BOJ and other major central banks next year.

While markets reckon the US Federal Reserve, European Central Bank, and Bank of England are at the end of their hiking cycles and pivoting toward interest rate cuts next year, the BOJ is only just emerging from years of negative rates and ultra-loose policy.

While no one is expecting the BOJ to raise rates on Tuesday, the landmark move could come sooner than many expect – the BOJ has already surprised markets with tweaks to its ‘yield curve control’ policy and intervened in the FX market buying yen, so who’s to say it won’t raise rates in January?

On Monday Japan’s yen weakened, the benchmark Nikkei 225 stock index fell and 10-year Japanese Government Bonds rose, which pushed the yield down around 4 basis points.

The yen has been one of the best-performing G10 currencies this month on growing hawkish speculation around the BOJ, appreciating almost 4% against the dollar since the turn of the month. This follows a 2.5% rise last month too.

Further yen strength will help the BOJ in its fight to get inflation sustainably back toward its 2% target, and households will welcome the downward pressure on import prices, but it will hurt exports, traditionally a major engine of economic growth.

Hedge funds have been net short the yen since March 2021, according to Commodity Futures Trading Commission data, but a shift is underway ahead of that seismic shift on rates from the BOJ, whenever it comes.

The latest CFTC figures show that the funds’ net short position is now the smallest in four months at 81,000 contracts. That’s an aggregate USD 7 billion bet against the yen, down from USD 11 billion only a few weeks ago.

Elsewhere on Tuesday, the Reserve Bank of Australia published the minutes of its last policy meeting, when it held rates at a 12-year high of 4.35%.

Asian stocks fell 0.5% on Monday, the steepest decline in two weeks, but that was perhaps to be expected given the 3% surge late last week after the Fed signaled US rate hikes are over and attention is now on when the easing cycle starts.

On the corporate front, Japan’s Nippon Steel (5401.T) on Monday clinched a deal to buy US Steel for USD 14.9 billion in cash, a bet that US Steel will benefit from the spending and tax incentives in President Joe Biden’s infrastructure bill.

While Nippon Steel’s shares are off some 15% from their recent peak, they have rallied around 50% over the past 12 months.

Here are key developments that could provide more direction to markets on Tuesday:

– Bank of Japan policy decision

– Reserve Bank of Australia minutes

– New Zealand trade (November)

(By Jamie McGeever; Editing by Josie Kao)