Get ready for the 2023 black swan: Once the BoJ capitulates, the market will be bloody

The Bank of Japan is likely to review its policy in mid-March next year and may change its traditionally accommodative stance. Among the world’s major central banks, Japan is still one of the few remaining dovish central banks, which means that if the Bank of Japan “capitulates”, everything from stocks to bond markets may be hit hard. Some have speculated that a rate hike by the Bank of Japan could trigger a rise in bond yields everywhere. | Related Reading (Wall Street Insights)

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In the global aggressive tightening led by the United States this year, Japan has taken a completely different path. The yen has depreciated sharply, Japanese bonds have not been traded for many days, and the trade deficit has surged. In particular, the Bank of Japan has adopted exchange rate intervention and monetary easing. The distorted relationship between China and Japan makes people wonder how long this situation can last in Japan and whether it will become a black swan next year.

Today, the Bank of Japan has failed to achieve its 2% price inflation target, and there is nothing the central bank can do in the face of the rapid depreciation of the yen. It should be noted that Haruhiko Kuroda, the current governor of the Bank of Japan, will end his 10-year term on April 8 next year. There are rumors that the old governor may end his term early for the March meeting. In this way, when the new governor takes office, Japan’s monetary policy may be revised as soon as possible, which will have a major impact on the yen exchange rate and the stock market, and will have an impact on the global economy as much as possible.

For the world, the significance of changes in the yen and Japanese debt is mainly to bring about a chain reaction through the supply of cheap money. Risk aversion or the rapid rise in Japanese debt financing costs may trigger part of the cost based on the depreciation of the yen and the low-interest financing of Japanese debt. Investors sell their assets and return the yen to reduce their positions, thereby increasing the demand for the yen. The formation of the de facto appreciation of the yen. If this is the case, then it is not ruled out that it will cause greater market disturbance.

However, as far as Japan is concerned, Japan’s macro leverage ratio has been above 400%. According to data from the Ministry of Finance of Japan, Japan’s overseas net assets will reach 411 trillion yen in 2021, which is about 3.6 trillion U.S. dollars. This makes Japan’s macro-leverage ratio look high, as Japan’s proportion of overseas assets ranks first in the world. In fact, Japan can afford a higher macro leverage ratio, which is why the Bank of Japan has always taken a loose stance. But next March, maybe everything will be different.

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