Bank of Japan's pivot on interest rates, digital currency, rising unemployment and the year in review
Hello, welcome to the latest issue of Markets and Macros.
The BOJ pivot?
When central banks across the globe were hiking interest rates to battle soaring inflation, one exception was the Bank of Japan. The Bank of Japan (BOJ) kept its interest rates lower at -0,1%, even as the inflation in the country has surged to its highest levels in 40 years.
Why? Well, that's as tricky to explain as Japan’s economy 😬
Few snippets from a recent New York Times article;
Japan wants good inflation — the kind created by lively consumer demand. But it has gotten bad inflation — the kind created by a strong dollar and supply shortfalls related to the pandemic and the war in Ukraine — and that is why the bank should stay the course.
The diverging economic circumstances in the United States and Japan have led to drastically different monetary policies, a gap that has helped drive down the yen as investors seek better returns elsewhere.
Rate rise would do more harm than good. The Japanese economy, the world’s third largest, has barely returned to its prepandemic levels, and wages have stagnated despite a labor market so tight that unemployment remained below 3 percent during the pandemic’s worst months.
Since 2016, the BOJ has been controlling the yields on its 10-year bonds in an effort to encourage consumer spending and investments.
The BOJ policy, introduced in 2016, was aimed at keeping yields very low to encourage consumers to spend and businesses to invest, and to head off the risk of deflation that could destabilize the economy and make it harder for the government and large companies to pay off their towering debts.
Central banks stimulate the economy through changes in short-term rates, but Japanese interest rates were already at -0.1%. This wasn’t enough to generate inflation. So the BOJ adopted a yield curve control program. Under yield curve control, central banks target long-term rates by buying bonds of specified maturities to pin down the yields. The hope is that this passes through to the broader economy in the form of lower mortgages, personal and corporate loans and stimulates consumption. But this had come under pressure as inflation rose, the yen crashed and interest rates around the world rose.
This Bloomberg piece dives deeper into the topic.
Things seem to be changing now. At its latest monetary policy meeting, the Bank of Japan relaxed the upper band limit on its 10-year bond yields to 0.5% from 0.25%, levels it hadn’t seen since 2015. Catching everyone off-guard.
While it looks like a small change, it isn’t. Why?
Yen is a funding currency since rates are low in Japan. I borrow in Yen, buy high-yielding assets such as US Treasury bonds, and lock in the difference—this is known as a carry trade. If the Yen strengthens due to Japanese central banks, then this trade is not profitable.
For instance, as of July 2022 (left chart) Japanese investors are the largest holders of US Treasuries in the world - Japan accumulated over $1 trillion in USTs as it was a convenient way to recycle excess savings: yield differentials were positive, and often more than offsetting the cost of hedging USD/JPY risks.
This move by BOJ affects this dynamics since Japanese investors will be getting better returns than they previously got within the country itself.
Japanese investors won’t find any additional yield by purchasing foreign bonds vis-à-vis JGBs unless they buy Spanish or Italian bonds - which will be under pressure as the ECB tightens policy and embarks in QT.
Now that Japanese investors are getting positively rewarded to keep their cash at home during a global economic slowdown and periods of high macro uncertainty... ...they probably will choose to do that more.
That strengthens the Yen, and negatively affects foreign assets.
And as the interest rates have raised this year, the sum of negative-yielding bonds has come crashing down to almost zero.
While people have been waiting for the US Federal Reserve to pivot from its hawkish stance. Instead, the Bank of Japan pivoted from its easy monetary policy. 2022 has been an interesting year on the macro front, what's in store for 2023?
By now you must have read a lot about digital currencies. It's been the talk of the town this year. In case you missed it, you can read about it here.
The Reserve Bank of India too introduced its version of Centrally Backed Digital Currency (CBDC), termed the e-Rupee in two categories, wholesale and retail, for which it launched pilots in November and December this year. If you want to know more about the RBIs take on it, please read this summary of the RBI concept note on CBDC.
Once you are through with these, it's time to move on to what Barry Eichengreen and Poonam Gupta have to say about India’s digital currency.
Basically what they are saying is that digital currencies may have advantages like facilitating cross-border transactions for our exporters and importers but technical obstacles, interoperability issues, and regulatory hurdles may still create a roadblock.
They also explain the rationale behind issuing CBDCs. In short, the issuance of a digital currency will allow the central bank and the government to retain control of the payment system which could face a threat from stablecoins and other private payment channels.
They talk about these issues a little more in this article.
Unemployment in India is shooting up again and is now at its highest since May 2021. Along with this, the pace of the addition of new jobs has also slowed down.
As of December 25, 2022, India’s unemployment rate stood at 8.42%. The unemployment in the urban areas was at 9.6% and that in the rural areas stood at 7.84% as per the Centre for Monitoring Indian Economy (CMIE).
As of November 2022, Haryana and Rajasthan were the worst off with an unemployment rate of 30.6% and 24.5% respectively.
“Economic growth has not revived, exports have fallen. MSMEs have been doing poorly since 2016. People who have returned to urban areas from rural areas are still looking for work or are finding only low-level jobs”
- Santosh Mehrotra, Economist.
Can agriculture help?
Agriculture has remained resilient due to a good monsoon. The sector was also less affected because it was a fallback option for many of those who lost city jobs. Read more about it here.
“The recent rise in the unemployment rate cannot be explained by the seasonal movement of labour in and out of agriculture...”
- Mahesh Vyas, CMIE Head
Moreover, agriculture’s ability to help the economy may be limited this time. It has already absorbed more workers than it can sustain.
How are we doing compared to the pandemic?
The CMIE all-India joblessness rate had skyrocketed to a peak of 23.52% in April, 2020, the month which saw Covid-induced lockdowns; though the rate eased thereafter, it climbed to another high of 11.84 % in May 2021.
What does the government have to say?
The government relies on the Periodic Labour Force Survey for data on employment and unemployment.
“Many private companies/bodies/research organisations conduct different surveys based on their own methodology, CMIE is one amongst them.
The all-India unemployment rate had declined to 4.2% by 2020-21 from 4.8% in 2019-20 and 5.8% in 2018-19.
The estimated Worker Population Ratio (WPR) on usual status for persons of age 15 years and above was 47.3%, 50.9% and 52.6% during 2018-19, 2019-20 and 2020-21, respectively, which shows that employment in the country has increasing trend”
- Rameswar Teli, Minister of State for Labour and Employment.
Job cuts in tech
India’s previously booming tech sector has seen 25,000 people rendered jobless this year.
“This year’s job cuts reflect a funding crunch in India’s once-thriving tech scene. The country’s start-ups raised $24.7bn in funds from January to November this year, according to data provider Tracxn, a 35 per cent drop compared with the same period the previous year when start-up funding hit record highs.”
Who is to blame for this?
“I’m sure tech companies across the board are overstaffed but that’s a factor of how much money they have access to, I often blame the venture capital and the PE money because they push a lot of start-ups to spend the money as quickly as they can.”
- Nikhil Kamath, co founder Zerodha Broking Limited and True Beacon
Are the job cuts affecting everyone in tech equally?
No. The demand for developers and software engineers is still high, if you have experience in tech and product roles you are good. But times are definitely hard for those in sales and the support staff.
But there is a silver lining. Even though jobs in tech are on a downturn, other sectors are picking up the baton.
Source: Financial Times
You can read more about this here.
2022 in review
While we have focused on unemployment above, we also recommend that you look at other important indicators of the economy and how they did this year. The Hindu has covered it beautifully. Click here to read.
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Because of the importance of AI, we should all be able to form an opinion on where this technology is heading and to understand how this development is changing our world.
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