BOJ Rate Hike - Likelihood?

[Deep Blue]

There have been rounds of talks with banks on some kind of inflation linked short term JGBs, asking for feedback on the design… clearly the BOJ is preparing to get a sizeable portion of the funding for the Government back into commercial banks over the medium term.

The 10 year JGB yield has moved from 0% to over 1% before QT has even gotten going in earnest.

Currently BoJ in buying around 6 trillion a month, what do you think it will be scaled back to? If you expect a slow, de minimus move then down to 5 trillion?

[Deep Blue]

Press reports of recent BoJ and commercial bank meetings are suggesting JGB buying to be cut in half.

https://www.businesstimes.com.sg/compan ... nutes-show

[TokyoWart]

Press reports of recent BoJ and commercial bank meetings are suggesting JGB buying to be cut in half.

https://www.businesstimes.com.sg/compan ... nutes-show

Have to wonder how they are going to manage this. Bank of Japan currently has something like $5 trillion (measured in US dollars) net on its balance sheet which is greater than Japan's GDP of $4.2 trillion. Compare that to the US Fed, which also has a bloated balance sheet of $7.3 trillion but one much smaller than the $27 trillion US GDP. I understand this would not be reducing the BoJ balance sheet but those numbers suggest to me that there is not enough private demand for JGB's to pick up the slack if the BoJ reduced its buying by that much.

[Deep Blue]

Everything has a price! Even I’d buy JGBs if the yield was good enough.

Banks, insurers and pension funds are natural buyers of JGBs if the yield is attractive enough. 0% did not cut it, as the 10 year was held there for many years. Now the yield is above 1% and probably heading higher - at some point demand kicks in.

BoJ has been talking to market participants and determining all this - they are well aware of the risks and are looking to mitigate them.

Issues of Japanese government fiscal sustainability are another matter though. I don’t see any good answers there.

[Bubblegun]

To me, the BOJ is going to end up being seen, as always, as being far too slow to make its policy changes. In a way I don’t blame it, as I’m not convinced that the whole idea of a lack of inflation was the source of Japan’s economic problems to begin with.

I don't think the lack of inflation was the source of Japan's economic problems either. I think since Japan has switched to being a consumer country, and we have already developed we don't need to buy anything. The stuff lasts for years and years, and I don't need to buy anything. My TV has lasted donkey's years as has our airline, and washing machine. Since we rent, we don't need to buy anything, and with empty homes cropping up all over the country, people don't refurbish, especially as they get older. So I think the structure is very different, from my home country where a financial churn is expected. low immigration also contributed to low spending. So the shops had to cut prices.
The only reason imho Japan thinks it will improve the economy is to inflate the debt away. As my friends said, I don't need anything. So there i nothing to buy. We have a fear of getting old and wondering can we afford to pay for health care. So we save. We worry that we may not have a pension, so we save. We can't cut the yen up both ways, metaphorically speaking. We can't ask people to save for their future, buy a home and spend their salary. We can't give it to Rakuten and give the very same money to Edion. I think that's why some countries let people near retirement take out lump sums of money, knowing it will be put into the economic churn.

[captainspoke]

... My TV has lasted donkey's years as has our airline, ...

Airline?

I'd settle for a nice gulfstream 'biz' jet.

[Bubblegun]

... My TV has lasted donkey's years as has our airline, ...

Airline?

I'd settle for a nice gulfstream 'biz' jet.

My bad. Didn’t notice that. Supposed to be aircon. Ofcourse I do wish I could get a gulf stream but I’d need the yen to ultra strengthen for that. 1 yen to the dollar. lol

[Deep Blue]

Lunchtime today for the answer. We know the BoJ is going to lay out the reduced pace of JGB buying, which is currently running at 6 trillion yen a month. What is uncertain is whether the policy rate will be hiked or not.

The odds at the moment:

11/49 economists think they will hike (Bloomberg survey)
OIS market pricing in about a 50% chance.

My take - it's essentially irrelevant whether they hike today or later this year. The final policy rate is much more important than the timing. I've seen estimates from 0.5% to 2.0% (!!!). My personal guess is we get to 0.75 to 1.0% by the end of 2025 and that's going to be pretty much it. The Federal Reserve will have cut several times by then and USDJPY will be back in the 120-140 range.

[Deep Blue]

BoJ raises policy rate to 0.25%

JGB buying to be cut by 400bn a quarter until Q1-2026 when it will be down to 3 trillion a month.

[sanfransicko]

As someone who is probably 4 or 5 years out from a home purchase - how high are these interest rate increases expected to continue? Kind of a crystal ball question, but should I be expecting 2%, 3% or even higher 5 years down the line?