New course: Ueda, the first academic to captain the BoJ, is largely expected to speed up the pace of policy tightening sometime this year. — AFP
TOKYO: Bank of Japan (BoJ) governor Haruhiko Kuroda changed the course of global markets when he unleashed a US$3.4 trillion (RM15 trillion) firehose of Japanese cash on the investment world.
Now Kazuo Ueda is likely to dismantle his legacy, setting the stage for a flow reversal that risks sending shockwaves through the global economy.
Just over a week before a momentous leadership change at the BoJ, investors are gearing up for the seemingly inevitable end to a decade of ultra-low interest rates that punished domestic savers and sent a wall of money overseas.
The exodus accelerated after Kuroda moved to suppress bond yields in 2016, culminating in a mountain of offshore investments worth more than two-thirds Japan’s economy.
All this risks unravelling under the new governor Ueda, who may have little choice but to end the world’s boldest easy-money experiment just as rising interest rates elsewhere are already jolting the international banking sector and threatening financial stability.
The stakes are enormous: Japanese investors are the biggest foreign holders of US government bonds and own everything from Brazilian debt to European power stations to bundles of risky loans stateside.
An increase in Japan’s borrowing costs threatens to amplify the swings in global bond markets, which are being rocked by the Federal Reserve’s year-long campaign to combat inflation and the new danger of a credit crunch.
Against this backdrop, tighter monetary policy by the BoJ is likely to intensify scrutiny of its country’s lenders in the wake of recent bank turmoil in the United States and Europe.
A change in policy in Japan is “an additional force that is not being appreciated” and “all G-3 economies in one way or the other will be reducing their balance sheets and tightening policy” when it happens, said Jean Boivin, head of the BlackRock Investment Institute and former deputy governor of the Bank of Canada.
“When you control a price and loosen the grip, it can be challenging and messy. We think it’s a big deal what happens next.”
The flow reversal is already underway. Japanese investors sold a record amount of overseas debt last year as local yields rose on speculation that the BoJ would normalise policy. Kuroda added fuel to the fire last December when he relaxed the central bank’s grip on yields by a fraction.
In just hours, Japanese government bonds plunged and the yen skyrocketed, jolting everything from Treasuries to the Australian dollar.
“You’ve already seen the start of that money being repatriated back to Japan,” said Jeffrey Atherton, portfolio manager at Man GLG, part of Man Group, the world’s biggest publicly traded hedge fund.
“It would be logical for them to bring the money home and not to take the foreign exchange risk,” said Atherton, who runs the Japan CoreAlpha Equity Fund that’s beaten about 94% of its peers in the past year.
Bets for a shift in BoJ policy have eased in recent days as the upheaval in the banking sector raises the prospect that policy makers may prioritise financial stability.
Investor scrutiny of Japanese lenders’ balance sheets has grown, on concern they may echo some of the stresses that have floored several regional US banks. But market participants expect chatter on BoJ tweaks to resume when tensions dissipate.
Ueda, the first academic to captain the BoJ, is largely expected to speed up the pace of policy tightening sometime this year.
Titanic bond-buying plan
Part of that may include further loosening the central bank’s control on yields and unwinding a titanic bond-buying programme designed to suppress borrowing costs and boost Japan’s moribund economy.
The BoJ has bought 465 trillion yen (RM16 trillion) of Japanese government bonds since Kuroda implemented quantitative easing a decade ago, according to central bank data, depressing yields and fuelling unprecedented distortions in the sovereign debt market.
As a result, local funds sold 206 trillion yen (RM6.87 trillion) of the securities during the period to seek better returns elsewhere.
The shift was so seismic that Japanese investors became the biggest holders of Treasuries outside the United States as well as owners of about 10% of Australian debt and Dutch bonds.
They also own 8% of New Zealand’s securities and 7% of Brazil’s debt, calculations by Bloomberg show.
The reach extends to stocks, with Japanese investors having splashed out 54.1 trillion yen (RM1.8 trillion) on global shares since April 2013. Their holdings of equities are equivalent to between 1% and 2% of the stock markets in the United States, Netherlands, Singapore and the UK.
Ultra-low rates
Japan’s ultra-low rates were a big reason the yen tumbled to a 32-year low last year, and it has been a top option for income-seeking carry traders to fund purchases of currencies ranging from Brazil’s real to the Indonesian rupiah.
“Almost definitely it contributed to a significant decline of the yen, a massive dysfunctioning of the Japanese bond market,” former UK government minister and Goldman Sachs Group Inc chief economist Jim O’Neill said of Kuroda’s policies.
“Much of what happened in Kuroda’s time will partially or fully reverse” should his successor pursue policy normalisation, although the banking crisis may cause authorities to proceed more cautiously, he added.
The currency has pulled back from last year’s lows, helped by a view that normalisation is inevitable.
Add to that equation last year’s historic global bond losses, and Japanese investors have even more reason to flock home, according to Akira Takei, a 36-year market veteran and money manager at Asset Management One Co.
“Japanese debt investors have had bad experiences outside the country in the past year because a substantial jump in yields forced them to cut losses, so many of them don’t even want to see foreign bonds,” said Tokyo-based Takei, whose firm oversees US$460bil (RM2 trillion). — Bloomberg
