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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,

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Speaker 1: and of course on the Bloomberg terminal. We are thrilled

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Speaker 1: at the quality of guests we have for you on

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Speaker 1: this historic day. With the Bank of Japan capitulating towards

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Speaker 1: a strategy like the Bank of England, the ECB and

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Speaker 1: the Fed as well. Dominic Constant with us earlier, many

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Speaker 1: people writing in an Hilarian in the nine o'clock hour,

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Speaker 1: and now Ian Lincoln with us out of us right

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Speaker 1: strategy at BEMO Capital Markets. The good news is he

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Speaker 1: can't drust straight line. So Ben Jeffrey took the Technical

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Speaker 1: Analysis award from Institutional Investor and his colleague Lincoln picked

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Speaker 1: up all the other pieces economics and strategy in the

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Speaker 1: fixed income space. Ian, what did you write this morning?

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Speaker 1: First of all, congratulations on the I I love fest. Uh,

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Speaker 1: you've wanted I think as many times is ed Hyman.

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Speaker 1: And you're a little bit younger I want you to

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Speaker 1: explain to us your first blush of this historic moment. Well,

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Speaker 1: thanks for congratulations, Tom, I appreciate that. In terms of

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Speaker 1: the Bank of Japan, I think the most surprising aspect

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Speaker 1: of it from our perspective was, yes, the timing, but

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Speaker 1: to some extent that they lasted this long. When we

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Speaker 1: think about what the rest of the world has been

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Speaker 1: engaged in over the course of it's been collective tightening,

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Speaker 1: coincidence perhaps and not coordinated. But the thank the fact

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Speaker 1: of the matter is that Bank of Japan is now engaged.

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Speaker 1: I stole from the foreign exchange space being capital markets

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Speaker 1: pretty darn good there as well. With Greg Anderson. You know,

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Speaker 1: I I look at the sterilized nature of this. We're

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Speaker 1: gonna make the move, but we're going to increase bond purchases.

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Speaker 1: Twenty five explained that. But to us and what that

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Speaker 1: means for global finance, I think that their decision to

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Speaker 1: increase the bond purchases was them implicitly acknowledging that someone's

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Speaker 1: going to try to push that fifty basis point upper

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Speaker 1: bound and to do that, they're going to need to

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Speaker 1: have the cash there to defend it. So that move

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Speaker 1: was a bit more intuitive than I think that the

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Speaker 1: headline might have otherwise implied. How sustainable do you think

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Speaker 1: that says? So? I think that the Bank of Japan

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Speaker 1: is going to run up against the reality of needing

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Speaker 1: to be more aggressive than they have been as the

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Speaker 1: two thousand and twenty three calendar unfolds. But I don't

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Speaker 1: think it's going to be as quick as the market

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Speaker 1: would like to see. We're hearing Jennie's out of the bottle.

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Speaker 1: Jennie's out of the bottle. This gets tested, new confnant

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Speaker 1: comes in, They're gonna have to make another move. How

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Speaker 1: would you think about and new confin to come again?

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Speaker 1: Corronto exits, April happens, What does that look like? From

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Speaker 1: what I understand, the front runner at the to replace

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Speaker 1: for the Bank of Japan is very much in keeping

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Speaker 1: with the overall mentality of Banka Japan. So I wouldn't

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Speaker 1: expect any massive policy shifts. But even if that were

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Speaker 1: the case, the groundwork has already been laid for a

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Speaker 1: bit more of a hawkish move, and so I wouldn't

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Speaker 1: be surprised to see out of negative rates sometime in

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Speaker 1: the first half of the Bank of Japan. Your shop

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Speaker 1: has the advantage of GALLO, and he's reporting into Greg Anderson,

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Speaker 1: who's just flat out legendary in tertiary foreign exchange analysis.

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Speaker 1: I don't know if you've spoken to Mr Anderson this morning,

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Speaker 1: but the idea of a presumed glide path of strong

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Speaker 1: yen from one fifty two modeling out even lower. Does

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Speaker 1: he have a conviction that that glide path can sustain

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Speaker 1: or is it overplayed? I think that his biggest takeaway

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Speaker 1: is that momentum has shifted and that the progress toward

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Speaker 1: the ultimate goal is going to be on autopilot to

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Speaker 1: some extent. So I think there's a high conviction on

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Speaker 1: the glidepath. Will they have the economic might, the animal

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Speaker 1: spirit of nominal or inflation adjusted that dynamic of inflation

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Speaker 1: of real g d P to allow for these trends

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Speaker 1: to occur and the unwind of their debt ownership, well,

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Speaker 1: I do think that the trajectory that's currently in place

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Speaker 1: suggests that they'll be very little problem getting there, although

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Speaker 1: ultimately we need to see how the first quarter shapes

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Speaker 1: up in Japan. We need to see what the impact

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Speaker 1: from a reversal of the end, if and when it

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Speaker 1: eventually occurs, is going to be for inflation in Japan.

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Speaker 1: Have you changed the treasury coll off the back of this,

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Speaker 1: what does it make for the treasury market? We haven't

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Speaker 1: changed your call. We still think ten year yields in

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Speaker 1: two thousand twenty three three, I think that's a relatively

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Speaker 1: benign forecast given where we are in the overall interest

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Speaker 1: rate cycle. And the one thing that I would emphasize

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Speaker 1: there is, at the end of the day, that's a

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Speaker 1: FED credibility call because we have break evens compressing back

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Speaker 1: to levels that were in place prior to the pandemic.

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Speaker 1: And the biggest risk is that the FED, which we

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Speaker 1: don't think they'll do this, but would be that the

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Speaker 1: FED gave up the two percent target and we just

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Speaker 1: don't see the path for them to do that. Well,

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Speaker 1: that's a longer conversation for another time. So three on

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Speaker 1: tens talk to me about where that is relative to

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Speaker 1: fend funds and the front end of the curve. I

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Speaker 1: think that the biggest surprise for two thousand and twenty

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Speaker 1: three is going to be the fact that both two

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Speaker 1: and ten year yields can trade well below effective FED funds.

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Speaker 1: We've already seen that start that typically doesn't occur until

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Speaker 1: we're later into the cycle and the FED has reached

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Speaker 1: terminal and terminal has been in place for a while,

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Speaker 1: so we actually don't see any rate cuts in two

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Speaker 1: thousand and twenty three, but we see deeper inversion of

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Speaker 1: funds versus twos and funds versus tens. Did you just

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Speaker 1: say that the terminal rate is wherever it is in

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Speaker 1: both twos and tens will be below that price up

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Speaker 1: yield down? Absolutely, that's what's in place right now. And

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Speaker 1: you also you also implied it could be as much

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Speaker 1: as two basis points, and it historically has precisely. So

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Speaker 1: what's your path, what your outlier on where the tenure

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Speaker 1: yield could be? So if I'm wrong, I'm wrong in

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Speaker 1: one of two ways. One is I have underestimated the

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Speaker 1: Fed's ability to keep policy on hold well into two

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Speaker 1: thousand and twenty four. We're assuming they make it through

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Speaker 1: twenty three twenty four. They needed to adjust and they

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Speaker 1: started laying the groundwork for that. That would imply that

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Speaker 1: there could be more upside, obviously in the front end

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Speaker 1: of the curve. The flip side being that we've underestimated

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Speaker 1: the extent of the recession that we might see, we're

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Speaker 1: looking for a more pedestrian, benign version of soft landing.

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Speaker 1: But if we got that wrong, then you could see

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Speaker 1: to handle on tenure yields relatively easily. And I think

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Speaker 1: you're brilliant. I've never seen someone so calmly explained something

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Speaker 1: that is actually a monster coldeerious, a serious, serious cold

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Speaker 1: and in sub common bat explaining, you know. And and

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Speaker 1: I had the great joy of knowing Fred we Gold

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Speaker 1: when he was at Bloomberg and of course at the

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Speaker 1: Walsters Journal. And these beauty contests are not a small

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Speaker 1: matter in stitutional investor in the Wall Street Journal U

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Speaker 1: the way they do the equity market contest, this is

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Speaker 1: really really hard. And part of it is not only

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Speaker 1: making a call. It's a delivery in Lincoln, does it?

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Speaker 1: I believe it's in English? Is what we call it

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Speaker 1: capital markets. Our team has been working since one am

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Speaker 1: on this in London, in New York, and we are

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Speaker 1: thrilled for Global Wall Street now to bring you Dominic Constant.

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Speaker 1: He's head of macro strategy at the Japanese bank Missooo.

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Speaker 1: He is at Missooi America's I want to make clear

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Speaker 1: that he is not speaking for the management of Missooo

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Speaker 1: Bank that would be inappropriate for those of you in

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Speaker 1: the United States. Missooo is nine roll up of three

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Speaker 1: banking giants in Japan. Missoo translate as golden ears of rice,

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Speaker 1: and all ears at Missoo Tokyo are attuned to the

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Speaker 1: monetary policy of their Japan. Dr Constant, thank you so

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Speaker 1: much for being with us today, Dominique. It's just as

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Speaker 1: simple as this. Given the zombie nature of the Japanese

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Speaker 1: economy for twenty years, the dearth of nominal GDP, the

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Speaker 1: bouts of disinflation and outright deflation. How constrained is this

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Speaker 1: Bank of Japan forward? How many degrees of freedom have

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Speaker 1: they lost in the lost decade? Well, I mean they

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Speaker 1: are clearly constrained in terms of the idea that they're

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Speaker 1: gets a sort of normalized, you know policy in any

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Speaker 1: way that we've seen it elsewhere. UM. But I think

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Speaker 1: the time complearly the the the idea of the UH,

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Speaker 1: the targeting the tenure yield and having negative interest rates,

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Speaker 1: those those days are numbers. The market is now pricing

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Speaker 1: for positive interest rates next year. UH. And this is

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Speaker 1: basically is letting the genie out for the bottle. UH.

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Speaker 1: And I think it's something that we all expected, but

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Speaker 1: the timing was obviously unexpected. I mean, the bj could

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Speaker 1: have done this earlier than the year, when the end

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Speaker 1: was under a lot of pressure. That was the obvious

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Speaker 1: time to do it. I mean we were pricing for

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Speaker 1: positive rate hikes or positive rates I should say, at

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Speaker 1: the front end back in June of this year. So

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Speaker 1: the idea is that they brought this forward. They're doing

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Speaker 1: it before Corona is obviously stepping down. I guess there

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Speaker 1: there's certain reasons why they're bringing it forward, um related

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Speaker 1: to the fact that perhaps they see an opportunity to

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Speaker 1: do it now, better to do that before the Fed

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Speaker 1: is actually reversing course on their own rates past, perhaps

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Speaker 1: as as priced by the market. I think that's that's

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Speaker 1: a logic behind some of this decision to go earlier.

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Speaker 1: If there is a bet of disinflation, two bouts of

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Speaker 1: US inflation, is stasistics better even in the United Kingdom,

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Speaker 1: a little bit of a whisper of better inflation. Is

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Speaker 1: this a bet by the Bank of Japan at three

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Speaker 1: point seven percent nationwide CPI can come in. I think

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Speaker 1: that's that's very interesting. I mean, basically, you know, we

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Speaker 1: are seeing Japanese inflation rising now is going to be

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Speaker 1: around four percent. The focus on the inflation from our

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Speaker 1: you know, from our Japanese colleague has been really around

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Speaker 1: the wage side to it. So the large wage negotiations

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Speaker 1: start taking place really in spring next year, so that

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Speaker 1: some of the logic called delaying any move was to

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Speaker 1: see kind of how those wage negotiations lets go. Because

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Speaker 1: the inflation you're seeing now in Japan is really very

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Speaker 1: much important from the you know, the weakness in the

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Speaker 1: end uh and uh. And it's the extent that that

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Speaker 1: becomes self fulfilling because say, wages are allowed to rise.

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Speaker 1: That's the big uncertainty. So my guess is UH, one

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Speaker 1: read from the decision to move earlier is there are

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Speaker 1: clearly is against be an expectation now that you are

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Speaker 1: going to see some wage growth finally, some decent wage growth,

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Speaker 1: at least in line perhaps with inflation exactly the doctor

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Speaker 1: Coustom you've written must read essays unquantitative easing and quantitative tightening.

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Speaker 1: And then there's a government with fifty to eight percent

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Speaker 1: ownership of domestic bonds, a government looking at a fiction

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Speaker 1: of a debt to GDP ratio out near two D

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Speaker 1: thirty two and fifty. Do you have a confidence that

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Speaker 1: Japan can unwind those two extreme positions. Yeah, I mean,

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Speaker 1: to be honest, we do. I mean and and and

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Speaker 1: the reason the reason it's obviously if there was a

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Speaker 1: really a shock uh widening in the band or you

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Speaker 1: get just getting rid of the band and allowing as

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Speaker 1: ort of free fall in the in the market, then

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Speaker 1: then obviously that would have raised concerns, uh, you know,

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Speaker 1: for for the you know, the debt holdings of Japanese

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Speaker 1: financial institutions and how well hedged they've been. I think

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Speaker 1: over the course of this year probably hedging has been

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Speaker 1: actually you know, put in place quite actively. We also

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Speaker 1: know that, for example, in the throne bond holding, the

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Speaker 1: Japanese institutions have been very cautious around the interests that

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Speaker 1: the increased in interest rates globally. So I think the

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Speaker 1: concern around sort of financial stability related to a sort

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Speaker 1: of shock move in interest rates has has diminished in

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Speaker 1: recent months. And the fact that you know, they are

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Speaker 1: only moving twenty five days points and it's not a

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Speaker 1: you know, it's not massive, and the back end has

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Speaker 1: obviously moved a lot before anyway, So I think that perspective,

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Speaker 1: you know, um, you know, there's relatively more comfort uh

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Speaker 1: from you know, from this unwind and constitive uh easing.

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Speaker 1: I think that the issue fundamentally though for Japanese finance institutions,

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Speaker 1: because they need to obviously get their sort of loan

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Speaker 1: deposit ratios are back in order and sort of reduced

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Speaker 1: their alliance on g GB holdings as as a large

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Speaker 1: part of their the assets side of their balance sheets.

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Speaker 1: And you know, that's going to take a long time. Uh.

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Speaker 1: And I think you know, you know, I I think,

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Speaker 1: you know, normalizing interest rates at the front end in

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Speaker 1: a sustainable way because inflation is higher and nominal growth

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Speaker 1: is basically more sustainably higher, that's gonna be the way

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Speaker 1: in which the Japanese banks will restructure their balance sheets

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Speaker 1: going board. It's going to take a while. You know,

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Speaker 1: we're not going you know, we're not having a massive

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Speaker 1: rise in interest rate. I think fair value and JGBS,

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Speaker 1: according to our JGB structs, is around teenty five based

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Speaker 1: points in ten years. So you know, you've basically done

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Speaker 1: half of that move basically by today, and and no

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Speaker 1: doubt we'll you know, get the other half in due course,

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Speaker 1: but probably not not until that the bj A has

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Speaker 1: actually lifted the overnight race as well. There will be

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Speaker 1: a lot of people waking up this morning thinking, well,

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Speaker 1: what does this mean for me? Why should I care?

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Speaker 1: Don What does this mean for global markets outside of Japan? Well,

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Speaker 1: I mean that's really important, and and you know we

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Speaker 1: all had that thought is like oh my god, you

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Speaker 1: know sort of what what does what sense is actually

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Speaker 1: need global ones? The first thing that obviously occurs to

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Speaker 1: a lot of people is that we've already sold off

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Speaker 1: global bonds massively without the Japanese markets really being that involved.

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Speaker 1: So the old days, when Japan would move aggressively, it

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Speaker 1: was often seen as a bit of a harbinger for

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Speaker 1: a global bond sell off, and that was all related

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Speaker 1: to things like the yen you know, repatriot Asian trade,

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Speaker 1: which related to a Japanese holdings of foreign bonds that

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Speaker 1: they basically needed to bring back because they were less attractive.

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Speaker 1: They're heading costs that kind of undermined their attractives, etcetera.

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Speaker 1: And so that was always concerned. What we've seen really

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Speaker 1: this year is the marginal flows in Japan have obviously

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Speaker 1: been zero actually negative. Maybe next sellers of global bonds

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Speaker 1: quite know, quite impressively, so um and um. That's partly

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Speaker 1: because as the bond market has sold off globally with

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Speaker 1: the ECB and the Fed raising rates and relatively aggressively. Uh,

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Speaker 1: you know, it doesn't it's not attractive for them to

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Speaker 1: be overseas. So my guess is that the impact basically

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Speaker 1: is gonna be somewhat much more muted now and so

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Speaker 1: far that's already been the case. And it's just that,

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Speaker 1: you know, these guys have not been exposed as as

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Speaker 1: as they might have been in previous titles. So yes,

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Speaker 1: it's a it's a it's a small negative called global bonds.

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Speaker 1: But it shouldn't see you know, we shouldn't see a

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Speaker 1: sort of you know, a kind of collapse in bond

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Speaker 1: markets higher you know, yields higher, uh, you know, on

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Speaker 1: the back of this normanization. That would be my my

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Speaker 1: my initial taken were going back ten years when we

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Speaker 1: used to look at that data for Japanese investors and

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Speaker 1: where their money was going, how many bunds they've bought

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Speaker 1: a board. Are we looking at that every month again? Yeah?

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Speaker 1: I mean we can do, but I mean they've been

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Speaker 1: really flat line now for for a while certainly this year,

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Speaker 1: so we can definitely sort of look at that. I mean,

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Speaker 1: there are there are important I think that you know,

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Speaker 1: there are there are important things also consider. I mean,

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Speaker 1: the the attractiveness of UM, the JGB market relative to uh,

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Speaker 1: you know, treasuries UM, you know, on a hedge basis

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Speaker 1: is still quite you know, it's still quite impressive. So

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Speaker 1: I think we know, basically the Japanese investors have are

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Speaker 1: being encouraged to sort of stay at home relatively speaking,

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Speaker 1: which is one of the reasons why you could argue

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Speaker 1: that b O J can have a fairly orderly exit

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Speaker 1: at this stage because you know, jgbs are you know,

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Speaker 1: attractive and now even more attractive, so so you know, yeah,

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Speaker 1: I mean I think we can definitely sort of look

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Speaker 1: at that data but in the back, but I don't

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Speaker 1: think it's the same, you know, with a slightly different world,

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Speaker 1: partly because of the you know, the different speed with

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Speaker 1: which these central banks have been moving. Without a doubt, Donic,

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Speaker 1: this was awesome thanks to us today, Dominic Constant of Missouri,

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Speaker 1: just have wonderful line. We've got a fantastic guest around

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Speaker 1: the table with us this morning. Happy to say that

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Speaker 1: Cassy Barrow of JP Morkan Asset Management joined US fixed

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Speaker 1: income portfolio manager. Cassy kind of go to that question.

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Speaker 1: I think they go to question in the morning. Is

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Speaker 1: it a step towards so called normalization or just resetting

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Speaker 1: the policy stance for something more sustainable. Which one is it?

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Speaker 1: So we did feel that the Bank of Japan's policy

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Speaker 1: was unsustainable. It was time for a move by them.

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Speaker 1: We think that it was important that they did it now.

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Speaker 1: They could have waited until January, but they didn't. And

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Speaker 1: so what we see is a policy rate or a

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Speaker 1: ten year yield around of fifty basis points is actually

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Speaker 1: fairly consistent with the ten ure yield that that we

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Speaker 1: have right now. So we don't necessarily think that this

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Speaker 1: is a huge story for the treasury market. Where we

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Speaker 1: are expecting to see a lot of flows is in Europe,

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Speaker 1: So we do expect European bonds to sell off on this.

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Speaker 1: That's where you're going to get that repatriation trade from

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Speaker 1: the carriage. So this is the Japanese demand that you

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Speaker 1: think is going to wind the Japanese demand that was

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Speaker 1: going into European bond markets. Is that a problem for

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Speaker 1: buttons A problem for the Italian bond market. Where is

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Speaker 1: it the bigger problem? Well, I think in general we've

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Speaker 1: seen upward pressure and yields across Europe. And I think

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Speaker 1: it's really interesting that you had the Fed try to

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Speaker 1: be as hawkish as it possibly could last week and

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Speaker 1: they weren't able to tighten financial conditions. And finally you

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Speaker 1: have the E c B and the b O G,

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Speaker 1: B O J come to the rescue and get financial

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Speaker 1: conditions to tighten. The Fed is not going at it alone. Um.

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Speaker 1: I think that that is actually a positive for bond

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Speaker 1: investors next year because global inflation is going to come

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Speaker 1: down and we're seeing these yield rises as an opportunity

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Speaker 1: to buy bonds and to leg into long duration positions.

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Speaker 1: Have the great fortune of sitting across a desk from

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Speaker 1: a guy who I think saw the financing World War One.

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Speaker 1: But Michael, I mean, it's just it's amazing what you're dealing.

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Speaker 1: It was both a compliment and wasn't it was. We're

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Speaker 1: working on thank you. The bottom line is everybody watching

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Speaker 1: and listening. He's seen a minus thirteen percent Bloomberg total return.

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Speaker 1: It is now negative six percent annualized two years now

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Speaker 1: six percent down six percent down? How long does it

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Speaker 1: take for me to get back to even if I'm

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Speaker 1: running an adult bond portfolio? Do you and Bob look

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Speaker 1: at it is a two year exercise? Or dare I say?

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Speaker 1: Is it a five year exercise? Right? So, I think

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Speaker 1: the question you're asking is very important because we talk

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Speaker 1: a lot about what's going to happen in the next

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Speaker 1: one week, two weeks, three months. But when you look

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Speaker 1: at a let's just say twelve month horizon and what

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Speaker 1: you can potentially get from a bond portfolio over the

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Speaker 1: next twelve months, Let's just look at the global aggregate.

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Speaker 1: For example, the yield is around five percent on a

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Speaker 1: US dollar hedge basis and if you have let's just

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Speaker 1: say a modest fifty basis point rally and yields over

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Speaker 1: the course of the next year, you're getting high single

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Speaker 1: digit returns on that portfolio next year. So that is

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Speaker 1: why kind of across the board you're hearing people say

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Speaker 1: not just bonds are back, but as we like to say,

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Speaker 1: fixed incomes fashionable again, fixed in comes fashionable home. Would

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Speaker 1: you make of that? I'm here in the equity guys

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Speaker 1: talk at fixed in come along. Yeah, yeah, I'll go

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Speaker 1: with that. You know, you see it behaviorally and culturally. Folks,

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Speaker 1: when you're walking down the street in New York, that's

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Speaker 1: like eighteen months to get my portfolio back to zero,

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Speaker 1: is what I'm looking at. Where do you do that

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Speaker 1: across the continuum? Do you use full faith and credit?

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Speaker 1: Is that I G value or do you have to

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Speaker 1: go to the land of Brammo and distressed. We are

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Speaker 1: sticking with high quality UM that has Did you see

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Speaker 1: the TV show Brammo Barrow? It would be just it

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Speaker 1: would be just with the oil all of LASA back

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Speaker 1: in the day. Yeah, but Brim o'bara would be a

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Speaker 1: great one hour fixed income distressed at you know, be

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Speaker 1: a great show. Okay, it would be good. Excuse me,

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Speaker 1: I interrupted. Absolutely, I'm just letting to carry on the

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Speaker 1: right to ignore it. So we are focusing on high

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Speaker 1: quality UM. You know, when when we look across the

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Speaker 1: opportunity set, with risk free rates significantly higher, you don't

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Speaker 1: have to extend into those sectors UM to get the

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Speaker 1: yield that you want to. So UM, we're thinking about

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Speaker 1: agency mortgages, We're thinking about investment grade credit, We're thinking

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Speaker 1: about securitized credit that's higher up in the capital structure. Okay,

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Speaker 1: I haven't answer this question. I think in like seventeen years,

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Speaker 1: what does issuance do? What does i G quality do?

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Speaker 1: Do they mean all the CFOs were down, we could

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Speaker 1: low yields the loving it? How do they reset? And

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Speaker 1: will JP Morgan see issuance in the next twelve months?

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Speaker 1: So they are going to have to continue to issue,

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Speaker 1: but generally banks have to or banks as well as

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Speaker 1: the most of the i G universe have termed out

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Speaker 1: their balance sheets and they've made themselves put themselves in

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Speaker 1: a very good position high cash balances. Uh, they've extended

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Speaker 1: out that debt um and they've put themselves in a

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Speaker 1: position where going into an expected recession, we've we've never

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Speaker 1: seen corporate fundamentals to be better. Can I finish on

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Speaker 1: the yold code then? Because when I said lost spike

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Speaker 1: to Bob, he thinks we're gonna get some real spread

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Speaker 1: widening in a recession on high yield. Can we finish that?

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Speaker 1: What are your thoughts on that? Now? We are still

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Speaker 1: expecting that spreads are going to continue to widen here,

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Speaker 1: So if you look at four hundred basis points range

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Speaker 1: on hot yeld spreads, what we're thinking here is Yeah,

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Speaker 1: if we do get a soft landing, these spreads are

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Speaker 1: are reasonable. But our expectation is that with the most

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Speaker 1: aggressive central bank tightening that you have seen since the nineties,

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Speaker 1: eventually this is going to bite and inevitably, um, when

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Speaker 1: the recession comes, spreads are going to to widen further

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Speaker 1: from here. This was great Calsey, not more often. This

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Speaker 1: is just fantastic love Cancy Vera from JP Morgan. Let's

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Speaker 1: get to wind Thin on this, the global ahead of

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Speaker 1: Currency Strategy at Brand Brothers, Hanahan win Thin. Thank you,

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Speaker 1: sir for being with us. What do you make of

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Speaker 1: these moves from the b LJ this morning? Well, first

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Speaker 1: of all, thanks for having me. I have to be honest.

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Speaker 1: When I went to see last night, I was worried

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Speaker 1: they wouldn't have anything to talk about. And lo and

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Speaker 1: behold we get a nice, nice, big surprise. Um. I'm

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Speaker 1: i am one of those fifty some economis who expected nothing.

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Speaker 1: This was a shock. Um. The Bank of Japan tend

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Speaker 1: to like surprises, even in this incredibly volatile environment. So

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Speaker 1: once again central banks are adding to global bal Ultimately,

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Speaker 1: not just the b o J, we have every central

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Speaker 1: bank around the world it's literally adding to all market

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Speaker 1: of alatility with the policy actions and Ford didance. So

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Speaker 1: it's a tough, tough um sort of road to to

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Speaker 1: travel for the investors. But bottom line, it's clear that

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Speaker 1: banquet Japan is gonna hike next year. We had second

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Speaker 1: half of next year, Pennsylvan. We thought again, like like consensus,

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Speaker 1: new governor comes into April, he does a review second

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00:23:12,880 --> 00:23:16,120
Speaker 1: half rate hike. But I think that's moved timetable much

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Speaker 1: further head. I think we get something as soon as

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Speaker 1: Q two once a new guy is maybe in Q

433
00:23:20,480 --> 00:23:22,840
Speaker 1: one if Carota wants a surprise again. So the global

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Speaker 1: monetary tighten train rambles on, and that's that's bad for

435
00:23:26,640 --> 00:23:30,200
Speaker 1: risk uh and sort of markets have been so used

436
00:23:30,200 --> 00:23:34,000
Speaker 1: to zero liquidity, I'm sorry, zero rates and abundant global liquidity.

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Speaker 1: So when you think this is a step towards normalization,

438
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Speaker 1: it's not just about making a more devish stunts more sustainable. Absolutely,

439
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Speaker 1: Corota can deny it all he wants, but this is

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Speaker 1: a clear step. And I would go back to my

441
00:23:45,040 --> 00:23:47,640
Speaker 1: e M experience, like once you start messing with the PEG,

442
00:23:48,560 --> 00:23:51,280
Speaker 1: the markets spelled smell blood in the water. Um I

443
00:23:51,440 --> 00:23:55,040
Speaker 1: suspect this zero point five range will be tested very

444
00:23:55,119 --> 00:23:59,560
Speaker 1: quickly and very aggressively. Uh. And I think the bankut

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00:23:59,640 --> 00:24:02,040
Speaker 1: Japan is that genie out of the bottle, perhaps a

446
00:24:02,040 --> 00:24:04,240
Speaker 1: little bit too soon, as you know that the big

447
00:24:04,280 --> 00:24:06,800
Speaker 1: movement is has been in the FX market, and I

448
00:24:06,800 --> 00:24:09,159
Speaker 1: think that's where we'll continue. We'll see that the real moves.

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00:24:09,160 --> 00:24:11,960
Speaker 1: But making no mistake that the martial test this this

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00:24:12,080 --> 00:24:15,920
Speaker 1: new sort of PEG arrangement and dr sin with great

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Speaker 1: respect for your Burmese heritage. Saving face, I believe is Anna.

452
00:24:20,359 --> 00:24:24,159
Speaker 1: I hope I'm pronouncing that correctly. It's Hontreo up in

453
00:24:24,640 --> 00:24:27,679
Speaker 1: Tokyo as well. And what I see here is a

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Speaker 1: massive exercise culturally for the Bank of Japan is a

455
00:24:32,440 --> 00:24:37,119
Speaker 1: domestic institution. To save face, how does the culture of

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00:24:37,160 --> 00:24:40,920
Speaker 1: this forward to April and the new governor fit in

457
00:24:41,160 --> 00:24:44,919
Speaker 1: explain the political calculus of the Bank of Japan is

458
00:24:44,960 --> 00:24:50,120
Speaker 1: a stagger to April. Sure, Tom, it's it's we had

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Speaker 1: um hints that there's some sort of policy review sooner

460
00:24:54,280 --> 00:24:56,680
Speaker 1: perhaps rather than later. But really I think the markets

461
00:24:56,720 --> 00:25:00,280
Speaker 1: really pro proved this because face it, government Corota has

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00:25:00,280 --> 00:25:05,160
Speaker 1: been uh devoutly dubbish throughout this this episode of higher inflation.

463
00:25:05,760 --> 00:25:08,520
Speaker 1: So it is strange to me in sort of saving

464
00:25:08,520 --> 00:25:13,600
Speaker 1: face to be saying one thing, you know, with certainty

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Speaker 1: and all of a sudden surprise and markets. So again,

466
00:25:16,400 --> 00:25:20,120
Speaker 1: I think sort of reality sort of took took precedence

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00:25:20,200 --> 00:25:22,719
Speaker 1: over sort of appearance. That is, they really couldn't keep

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00:25:22,720 --> 00:25:24,760
Speaker 1: this going much longer. Um, we got it. We have

469
00:25:24,800 --> 00:25:26,600
Speaker 1: a CPI print coming out on Friday. It's like the

470
00:25:26,640 --> 00:25:30,200
Speaker 1: show Throw the Rise with Chord headline that he became hard,

471
00:25:30,240 --> 00:25:33,000
Speaker 1: harder and harder to sustained this facade that that they're

472
00:25:33,000 --> 00:25:36,320
Speaker 1: going to keep keep things as is. Yeah, so it's

473
00:25:36,359 --> 00:25:38,920
Speaker 1: it's a tough it means very tough to break now

474
00:25:39,080 --> 00:25:41,240
Speaker 1: again once once this genie is out of the bottle

475
00:25:41,440 --> 00:25:44,600
Speaker 1: and all bets are off for mere mortals away from

476
00:25:44,720 --> 00:25:48,399
Speaker 1: the dynamics of monetary policy and theory, what is his

477
00:25:48,640 --> 00:25:53,560
Speaker 1: dominant constraint? Is it fiscal debt to GDP migrating to

478
00:25:55,119 --> 00:25:57,680
Speaker 1: is that the inflation rate you speak of? Is it

479
00:25:57,920 --> 00:26:01,200
Speaker 1: end dynamics as a China? What's then straight you're focused

480
00:26:01,240 --> 00:26:04,159
Speaker 1: on Tom I said to be honest, and this is

481
00:26:04,520 --> 00:26:07,320
Speaker 1: not being self as all the above. They're juggling so

482
00:26:07,359 --> 00:26:11,440
Speaker 1: many targets with very few instruments. UH and central banks

483
00:26:11,880 --> 00:26:13,840
Speaker 1: around the world have gotten involved in the way way

484
00:26:13,880 --> 00:26:17,880
Speaker 1: beyond sort of their the remit um I believe so

485
00:26:18,000 --> 00:26:19,440
Speaker 1: as you. I think the main thing is you point

486
00:26:19,480 --> 00:26:21,520
Speaker 1: out with the debt GDP ratio right there, they've been

487
00:26:22,160 --> 00:26:25,320
Speaker 1: they own half of all g g g gbs, as

488
00:26:25,359 --> 00:26:31,080
Speaker 1: Johnathan pointed out, and certain tranches. Once the UH interest

489
00:26:31,160 --> 00:26:34,320
Speaker 1: rates start going up, those barring costs are going up sharply. Right.

490
00:26:34,359 --> 00:26:36,040
Speaker 1: That's the one thing that's kept the whole ball of

491
00:26:36,040 --> 00:26:38,840
Speaker 1: wax going is that they've been issuing debt, buying debt,

492
00:26:38,840 --> 00:26:41,760
Speaker 1: but at really low UH you know, sort of sub

493
00:26:41,800 --> 00:26:45,560
Speaker 1: market rates. If the ten year deal goes to from

494
00:26:45,760 --> 00:26:48,040
Speaker 1: zero point went up to even one percent or two percent,

495
00:26:48,280 --> 00:26:50,600
Speaker 1: which is not out of the question, all of a sudden,

496
00:26:50,640 --> 00:26:53,679
Speaker 1: the debt burden jumps. Now on the other side, this

497
00:26:53,720 --> 00:26:55,680
Speaker 1: and this is what where my head starts to really hurt.

498
00:26:56,240 --> 00:26:59,360
Speaker 1: It's hard to explain, harder heart explaining. Well, half that

499
00:26:59,520 --> 00:27:01,720
Speaker 1: is how by the government. It's not like it's held

500
00:27:01,720 --> 00:27:04,720
Speaker 1: by foreigners and there's a run on hand. So it's

501
00:27:04,760 --> 00:27:08,000
Speaker 1: it's a strange, strange construct that's developed over the last

502
00:27:08,040 --> 00:27:10,600
Speaker 1: two decades, and my feeling that they tried to keep

503
00:27:10,680 --> 00:27:13,280
Speaker 1: us going sort of the can down the road. I

504
00:27:13,320 --> 00:27:15,520
Speaker 1: thought they're gonna do more kicking than they have them.

505
00:27:15,600 --> 00:27:17,359
Speaker 1: But it's a shock that they moved to theare went

506
00:27:17,480 --> 00:27:19,639
Speaker 1: just briefly, that phrase, the genie is out of the bottle,

507
00:27:19,880 --> 00:27:21,440
Speaker 1: It's not the first time I've heard it this morning.

508
00:27:21,440 --> 00:27:23,399
Speaker 1: I think a lot of people share that sentiment. My

509
00:27:23,480 --> 00:27:25,720
Speaker 1: question would be, if that's the case, why aren't we

510
00:27:25,800 --> 00:27:28,320
Speaker 1: testing the upper limit of that band this morning? Why

511
00:27:28,320 --> 00:27:31,480
Speaker 1: aren't we up at fifty basis points on a Jampanese tenure.

512
00:27:31,520 --> 00:27:34,200
Speaker 1: Why do you think that is? I would say it's

513
00:27:34,320 --> 00:27:35,960
Speaker 1: too soon to say. I mean, you know, this literally

514
00:27:35,960 --> 00:27:38,639
Speaker 1: just happened hours ago. Give us some time, you know,

515
00:27:38,640 --> 00:27:41,480
Speaker 1: as you know these big markets, it takes some people, uh,

516
00:27:41,640 --> 00:27:43,800
Speaker 1: some participants time to sort of digesting. But I think

517
00:27:43,840 --> 00:27:46,720
Speaker 1: when all the dost settles, um, it's pretty clear that

518
00:27:46,760 --> 00:27:49,600
Speaker 1: you sell jgbs and by the end, you know this

519
00:27:49,680 --> 00:27:52,679
Speaker 1: is in terms of the risk, you know why they

520
00:27:52,720 --> 00:27:54,240
Speaker 1: put up I think they did not want to risk

521
00:27:54,240 --> 00:27:57,439
Speaker 1: a strong end and we have to talk about but perhaps,

522
00:27:57,440 --> 00:27:59,480
Speaker 1: I mean, you know, nore On Dolly Inn. Let's take

523
00:27:59,480 --> 00:28:01,800
Speaker 1: one thing step with time, but strongly. Yeah, at this

524
00:28:01,800 --> 00:28:05,520
Speaker 1: point I think is a pretty uh shure thing. When

525
00:28:05,520 --> 00:28:09,159
Speaker 1: this was a pleasure, Thank you, said of grand brother's

526
00:28:09,160 --> 00:28:12,840
Speaker 1: handy man. This is the Bloomberg Surveillance Podcast. Thanks for listening.

527
00:28:13,200 --> 00:28:16,520
Speaker 1: Join us live weekdays from seven to ten am Eastern

528
00:28:16,760 --> 00:28:20,840
Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from

529
00:28:20,880 --> 00:28:26,119
Speaker 1: six to nine am for insight from the best in economics, finance, investment,

530
00:28:26,280 --> 00:28:31,280
Speaker 1: and international relations. And subscribe to the Surveillance podcast on

531
00:28:31,400 --> 00:28:35,200
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on

532
00:28:35,320 --> 00:28:39,440
Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg