If last week was all about enjoying the Saint Tropez summer on Club 55's beach with Rosé provençal-sipping VIPs, this week's theme was coming back to to your office and girding for the impact of three heavy-hitters: the Bank of Japan, the Federal Reserve, and the Bank of England.
While we remain grateful, at least, for the office's generous air conditioning, Tuesday's BoJ meeting left many observers wondering whether if they should have just ordered another bottle of Rosé and let the party roll, as nothing has changed much compared to last week, and the Fed and BoE do not look likely to rock the boat.
The BoJ decided not to join global central banks in their tightening spree and once again highlighted the fact that the Japanese economy is not correlated to US economic cycles. The central bank also stated that it will do whatever it is necessary, but will most of all simply wait for the economy to generate its target inflation rate of 2%.
The truth is that we are still far away from this target. The BoJ had to revise its inflation forecast to 1.5% for 2019 which tells us that we will see ultra-loose monetary policies for longer and that no major changes are likely until 2020.
What changed at this meeting is that governor Kuroda 'blinked' in the face of high market expectations by saying that the BoJ will now allow 10-year Japanese government bond yields to fluctuate by 20 bps around zero, doubling the previous range. Kuroda claims that the measures should improve dynamics in the Japanese bond market, which ultimately will support an extension of QE, implying that he’s going to patiently hold tight and wait for the economy to recover.
This adjustment has already provoked volatility in the Japanese bond market; yesterday saw the 10-year yield drop to 0.5% while today it is trading above 0.1% for the first time in a year, and this measure will for sure put US credits under pressure and might contribute to a faster yield curve inversion in the US.