BOJ Hilkes, Market Yawns

The Bank of Japan raised the overnight call rate by 25 bp to 0.50% and the yen sold off. Expectations had been nearly evenly divided. Early in the session, Japanese media reported that BOJ Governor Fukui had proposed a rate hike. The market reacted by taking the dollar from JPY120.50 to JPY119.75. The dollar had then stabilized until the actual announcement was made, then it fell to a marginal new low before rebounding smartly as Fukui indicated further hikes would be gradual. By early in the European session, the dollar was making new highs for the day against the yen.

Fading of the Home Bias: The Unappreciated Story

Investors have traditionally shown a preference for their own markets. This is perfectly understandable. Invest in what you know best, is often the advice of professionals. However, liberalization of capital markets and the pursuit of better returns have seen the home-bias fade. This is especially noteworthy in Japan, one of the world’s largest creditor nations, as well as the United States, the world’s largest debtor.

Gaming G7

Over the last couple of weeks we have consistently argued that the European finance ministers were setting up the market for disappointment if the G7 statement does not single out Japan or express concern over the weakness of the yen. We had thought such disappointment would hit the yen hard. However, the price action has been such where we now suspect that the market has sold yen on speculation of disappointment and is vulnerable to a buy on the fact.

Eyes on the Prize: Yuan not Yen

There is much focus on the upcoming G7 meeting. European finance ministers have bemoaned the yen’s weakness. The US policy toward China prevents it from being sympathetic towards Europe’s concerns.