Outlook for 2023: Yen appreciation called by Japan-US monetary policy “ vector reversal ”, 110 yen = Yasuya Ueno | Reuters

[Tokyo, 3rd]- The biggest shock to financial markets in 2022 was the monetary policies of the US and European central banks, including the US Federal Reserve Board (FRB).

The biggest shock to the financial markets in 2022 was the monetary policy of the US and European central banks, including the US Federal Reserve Board (FRB). Column by Mr. Yasuya Ueno. (2023 Reuters/Shohei Miyano)

Realizing that the supply shock accelerated the inflation rate was temporary, the Fed changed its stance from a dove to a hawk. Amid the burden of being completely late to the start of the interest rate hike, the Bank has repeatedly raised interest rates by a wider range than the usual 0.25 percentage point.

However, towards the end of 2022, the pace of interest rate hikes slowed down around the world, with the US Federal Open Market Committee (FOMC) meeting in December raising only 0.5 percentage points. rice field.

The next step after “pacing down” is, if you think about it normally, “suspension” of interest rate hikes.

After the rate hike reaches the terminal rate (final point) in the current phase and is “stopped,” how much will the effects of monetary tightening permeate the real economy, specifically, how much the rate of wage and price growth will slow down? At the same time, the economy (especially the unemployment rate) will enter a “wait-and-see” stage in which the latest data will be used to confirm how much the economy will deteriorate. If you compare it to a trapezoid, it is the time zone that corresponds to the upper base.

Several FOMC attendees are sending the message that the Fed will not cut rates at least until 2023. Bearing in mind the experience of the oil crisis, Fed Chairman Jerome Powell and his colleagues seem to think that premature reversal of rate cuts could be a big mistake that ignores the lessons of history.

That said, moving too slowly to cut rates could also be a major failure for the Fed by deepening the recession. As stated in the FOMC statement in November as a precursor to the reduction in the rate hike in December 2022, the “cumulative effect” and “lag” of rate hikes cannot be overlooked when conducting monetary policy. .

The effect of the rate hikes, which have been repeated at a rapid pace, will start to affect the economy and prices from now on. Even though the lag is now a little shorter than the traditional 12-18 months, it doesn’t mean the lag is gone.

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If you compare it to driving a car, you can guess what is likely to happen on a dark road with your headlights on but with poor visibility in front of you based on past data such as economic indicators, model formulas, annexdote, etc. After making an outlook, it runs forward along it.

Last rate hike to first rate cut, eight-and-a-half months in the past

Until November, I was running at three or two times my normal speed, but in December (and probably even more in February 2023), I slowed down and was careful not to fall into the pitfalls that appeared on my way. The Fed will move forward. Many other central banks around the world are adopting that pattern as well.

In the US, the interval between the last rate hike and the first rate cut in the past four phases has averaged eight and a half months. If we simply apply this pattern, if we consider the February 2023 rate hike to be the last, the first rate cut could occur at the FOMC meeting in November of the same year. If there is one more rate hike, and if the rate hike in March 2023 is the last, it will be the first rate cut at the FOMC in December of the same year. Assuming that interest rate hikes will be halted in the near future, there is no sense of incongruity in the fact that financial markets are pricing in interest rate cuts from the fall of 2023 to the end of the year.

However, the Fed will have to feel frustrated when the financial markets price in such rate cuts. This is because if long-term interest rates decline and stock prices rise due to an early interest rate cut, the financial environment will loosen, and the effects of monetary tightening, which the Fed is planning, will not fully permeate the economy. This is because

Therefore, hawkish talk is often issued from the FRB side to the financial market. Such messages from the summer of 2022 will probably continue in the first half of 2023.

However, even for the FRB, if the inflation rate and expected inflation rate are steadily declining, and real interest rates are rising as a result, it will be difficult for the FRB to bring hawkish talk to the fore.

This is because, theoretically, a rise in real interest rates would increase the effect of monetary tightening. As I mentioned earlier, the Fed, which is fully aware of the “cumulative effect” and “lag” of rate hikes, believes that if the rate of inflation rises naturally due to fluctuations in the inflation As a driver who takes care of the car, it becomes necessary to make adjustments in the direction of slowing down.

The market prices of international commodities such as energy and grains, which have pushed up the prices of goods, have ended their rising phase and turned to a downward phase. The Reuters/Jefferies CRB index, which once approached 330 points, is now below 280 points.

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In addition, amid the tight supply and demand of rental housing, rent, which has been the main cause of inflation in the service sector, is expected to continue to decline in the official consumer price statistics, given the movement of the new rent index released by the Federal Reserve Bank of Cleveland in December. It is highly probable that the rate of increase will peak in the April-June quarter of 2023, and that the year-on-year rate of increase will shrink markedly from the July-September quarter of the following year.

Prices of services other than rent are greatly influenced by trends in labor costs, but if the economy slows down further, the tightness of the labor supply and demand will ease, and the wage increase rate will slow down.

Although the trend toward early retirement among seniors triggered by the coronavirus pandemic is unlikely to change significantly, if the influx of immigrants from overseas expands, the tightening supply and demand for employment in the face-to-face service industry will become easier to resolve.

In 2022, the dollar/yen exchange rate temporarily moved to 151.94 yen, depreciating the yen against the dollar and depreciating the yen. Focusing on the “vector difference” between the Fed’s and the Bank of Japan’s monetary policy, it can be said that such a move was achieved at a time when market fluctuations were accelerating in a “single-point concentrated” manner, without a firm foothold. .

This is a far cry from the level calculated by think tanks through multiple regression based on various variables, or the purchasing power parity calculated based on the difference in inflation rates. There is nothing wrong with the fact that the US dollar/yen exchange rate has temporarily rebounded to the 130 yen level, depreciating the dollar and strengthening the yen.

The biggest focus in considering the dollar/yen exchange rate in 2023 is how foreign exchange market players anticipate changes in the monetary policy vectors of the Japanese and US central banks and proceed with trading.

In the second half of 2022, the term “Fed Pivot” was often heard to indicate the theme of financial markets. The Fed, known as the Fed in the United States, has been buying long-term US bonds and stocks after guessing when it will pivot from raising interest rates to cutting interest rates.

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Then, in December, the term “BOJ pivot” appeared. The implication is that the BOJ (Bank of Japan) has decided to change direction from one-sided monetary easing to normalization of monetary policy, that is, monetary tightening.

Ultimately, it will depend on the economic situation and the intentions of the Japanese government (the Fumio Kishida Cabinet for the time being), but while the Fed will turn to an interest rate cut in 2023, the BOJ will normalize monetary policy under the new regime after the change of governor and deputy governor. There may be a situation where market participants buy and sell because they are wary of being oriented toward

In that case, the “different vector” of the monetary policy of the central banks of Japan and the United States will be the exact opposite of what happened in 2022, when it became the driving force behind the rapid appreciation of the dollar and the depreciation of the yen. Already, an increasing number of market participants are predicting a depreciation of the dollar and a strengthening of the yen to 120-125 yen in 2023. The author predicts that the yen may appreciate further to around 110 yen depending on how it develops.

Editing: Kazuhiko Tamaki

*Based on information up to December 27.

*This column was posted on the Reuters Forex Forum. It is based on the author’s personal opinion.

* Yasunari Ueno is Chief Market Economist at Mizuho Securities. After working at the Board of Audit, he joined Fuji Bank in 1988. After working as a forex dealer, he was a market economist in the forex, treasury and fixed income sections. He has been in his current position since 2000.

*Content such as news, trading prices, data and other information in this document is provided by columnists for your personal use only and not for commercial purposes. is not. The content of this document is not intended to solicit or induce investment activity, nor is it appropriate to use the content for the purpose of making a trading or buying or selling decision. This content does not provide any investment, tax, legal, etc. advice that constitutes investment advice, nor does it make any recommendations regarding specific financial stocks, financial investments, or financial products. Use of this document does not replace the investment advice of a qualified investment professional. Although Reuters makes reasonable efforts to ensure the reliability of the content, any views or opinions provided by a columnist are those of the columnist and not those of Reuters.

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