The world of finance was sent into a frenzy earlier this week when Bank of Japan Governor Haruhiko Kuroda made a shocking announcement that sent ripples through global markets.
In a move that surprised all 47 economists surveyed by Bloomberg, Kuroda doubled the cap on 10-year yields, paving the way for potential monetary policy normalization under a new governor.
But the impact of this decision extends far beyond Japan’s borders. The cap on 10-year yields has played a crucial role in keeping borrowing costs low worldwide, and this change has the potential to upend global markets. To add fuel to the fire, Japan’s key inflation gauge accelerated to its fastest pace since 1981, leading to speculation that the Bank of Japan (BOJ) could surprise markets again.
Meanwhile, in the US, the Federal Reserve’s preferred inflation gauge continued to retreat, but wages are still rising at a rate that is too fast for policymakers’ liking. While real consumer spending has remained flat, officials will want to see more data before determining if demand is significantly cooling.
Kuroda’s move to widen the trading band on 10-year bond yields caused a jump in the yen and turmoil in global markets. The yen strengthened and bond yields rose, while stocks fell. As the last advanced economy holding out in a global shift towards tighter monetary policy, the BOJ’s decision to allow the benchmark yield to trade higher than before will have far-reaching effects on financial markets worldwide.
In China, the broad budget deficit hit a record high this year, highlighting the damaging effects of the now-abandoned Covid Zero policy and the ongoing housing slump on the economy and government finances.
Bloomberg calculations based on data from the Ministry of Finance show that the augmented fiscal deficit was 7.75 trillion yuan ($1.1 trillion) between January and November.
In the US, inflation has continued to ease towards the end of 2022 and expectations for future increases have decreased, leading to hopes that the worst bout of price pressures in a generation is finally coming to an end. However, wages are still climbing too quickly as the job market remains tight. Sales of previously owned homes in the US fell for a tenth consecutive month in November, extending a record decline as high mortgage rates continue to hinder affordability.
In Canada, the inflation rate decelerated in November but key indicators of underlying price pressures trended higher, potentially dashing hopes for a pause in interest rate increases. Consumer price data show that price pressures remain stubbornly high, even as the economy slows and higher borrowing costs curb domestic demand.
The global economy is facing a myriad of challenges and uncertainty, and it remains to be seen how these developments will play out in the coming months. One thing is certain: the financial world will be closely watching to see what the BOJ and other central banks do next.