Podcast Summary
In this episode, Jens Nordvig, founder and CEO of ExAnte Data and Market reader Inc., discusses the economic situation in Japan. He covers topics such as the weakening yen, the Bank of Japan’s monetary policy, and the potential for bond yields to rise. He also touches on the impact of these factors on the global economy and the cryptocurrency market.
Key Takeaways
Japan’s Economic Normalization
- Historical Normalization: Jens Nordvig believes that Japan is experiencing a historical normalization, with many indicators and macro trends looking more normal and similar to the rest of the world. This includes a shift from externally driven supply pressures to domestically driven dynamics.
- Monetary Policy Response: The Bank of Japan is expected to respond to these changes with policy normalization, potentially including interest rate hikes. This is despite the fact that Japan still has very easy monetary policy, with lending growth and credit growth in the country.
Japan’s Inflation and Wage Growth
- Inflationary Forces: Despite a decline in year-over-year headline inflation, Yen believes that core inflationary forces are still present in Japan, particularly in wage growth. This is expected to transition to a different type of inflation, driven by demand and homegrown cost pressures.
- Wage Growth: The tight labor market in Japan, due to strict immigration policies and demographic factors, is likely to generate more wage growth in the next few years than seen in the past few decades.
Yield Curve Control and Bond Yields
- End of Yield Curve Control: The Bank of Japan implemented yield curve control to anchor yields at a low level when they ran out of bonds to buy during aggressive quantitative easing. However, this policy has been phased out, allowing bond yields to break 1% and signaling the end of yield curve control.
- Potential for Rising Bond Yields: Yen discusses the potential for bond yields in Japan to continue rising, highlighting the asymmetry in the market and the possibility of a tightening cycle. He suggests that the Bank of Japan may start with a small 10 basis point increase in interest rates as a signal of change, followed by cautious 25 basis point steps.
Impact on the Yen and Global Economy
- Yen-Dollar Exchange Rate: The debate is centered around the dollar-yen exchange rate, which has reached the intervention level of 157 yen per dollar. A model is used to analyze the yen’s deviation from fundamental drivers, such as global interest rates and the dollar as an anchor currency.
- Impact on Global Fixed Income Assets: The shift in Japanese yields could have a net bearish effect on global fixed income assets, including US Treasury rates. The maturity profile of the Bank of Japan’s holdings suggests that the private sector will have to absorb a significant amount of newly issued Japanese government bonds, leading to a normalization of term premia in the Japanese yield curve.
Sentiment Analysis
- Bullish: Jens Nordvig expresses a bullish sentiment towards Japan’s economy, citing the country’s historical normalization and the potential for bond yields to rise. He also believes that the Bank of Japan’s policy normalization, including potential interest rate hikes, is a positive development.
- Bearish: Despite his overall bullish sentiment, Nordvig does express some bearish views. He notes that the yen’s weakness may lead to higher import prices and inflation, which could impact interest rate normalization. He also suggests that the shift in Japanese yields could have a net bearish effect on global fixed income assets.
- Neutral: Nordvig maintains a neutral stance on the cryptocurrency market, referring to it as a “crab market.” He remains optimistic about the Ethereum ecosystem, despite a bearish market, citing ongoing developments like layer twos and staking.
