Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Currencies, Equities

Scary movie sequel beckons for eurozone markets

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Dollar rises as markets turn eyes to Opec

European bourses are mirroring a tentative Asia session as the dollar continues to be supported by better US economic data and investors turn their attention to a meeting between Opec members. Sentiment is underpinned by US index futures suggesting the S&P 500 will gain 3 points to 2,207.3 when trading gets under way later in […]

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Categorized | Capital Markets, Currencies

The Bank of Japan’s yield curve call

Posted on September 21, 2016

(FILES) This file photo taken on September 22, 2010 shows a bank teller counting 10,000 yen bank notes in Tokyo. The yen fell sharply against the US dollar on January 27, 2011 after Standard & Poor's downgraded Japan's credit rating, tumbling to 83.20 yen from around 82.12 yen earlier. AFP PHOTO / FILES / Yoshikazu TSUNO (Photo credit should read YOSHIKAZU TSUNO/AFP/Getty Images)©AFP

Central bankers crave credibility; without it, they cannot influence the market. Usually, earning the credibility has come by killing off incipient inflation to protect, as necessary, the country’s currency.

Not in Japan. There the Bank of Japan has the opposite dilemma. The yen, if anything, is too popular as a safe haven. A strong yen has tended to increase deflationary pressures and stifle economic growth, not to mention hurting key export industries.

    If anything, the BoJ is a central bank trying its best to make the yen a bad choice for investors. And, boy, has it tried, using multiple policy tools to disappoint, and encourage more inflation.

    That worked, for a while at least. The yen fell and inflation picked up; the Topix share index more than doubled.

    Unfortunately for the BoJ, inflation expectations reversed last year. Then in January it joined other central banks in applying a negative interest rate policy to make holding yen in banks positively costly. That didn’t work: the yen stayed more or less put.

    On Wednesday came the latest pronouncement, yield curve control, aiming to push up long bond yields relative to short-term interest rates. In the hope of helping banks, hurt by negative interest rates, the BoJ would widen the (positive) spread between short and long-term yields.

    Most banks make their money on arbitraging cheap depositor money and lending it out long term at higher rates. A steeper curve has led to better performance of Japanese bank shares. That sector has outrun the broader market when the curve has steepened in recent years. Wednesday was no exception as bank shares were the best performers.

    Foreign exchange traders, though, did not care much and the yen was unchanged after a brief dip. Indeed, Paul Lambert at Insight Investment thinks the BoJ has so many targets — inflation, currency, negative interest rates and yield curve shape — that it’s distracting. The yen is more likely to drift higher under such confusion.

    The BoJ deserves plaudits for creativity in trying to curtail Japan’s deflation problem. But this latest policy move looks more likely to complicate its efforts.