Currencies

Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

Continue Reading

Property

Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

Continue Reading

Currencies

Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

Continue Reading

Banks

RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

Continue Reading

Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

Continue Reading

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.

    alan.livsey@ft.com