BOJ Tweaks Forecasts

Overview: The markets head into the weekend with little fanfare. Most large equity markets in the Asia Pacific region slipped earlier today. Hong Kong, which will be exempt from the need to secure mainland's cybersecurity approval for foreign IPOs, and Australia were notable exceptions. European bourses are edging higher, while US futures are oscillating around unchanged levels. After closing below 1.30%, the US 10-year yield is around 1.33%. European yields are little changed, but German, Dutch, Spanish and Greek benchmarks recorded new three-month lows today. The US dollar is narrowly mixed. Dollar-bloc currencies and the Scandis are posting modest gains, while the yen and Swiss franc are sporting a softer profile. The euro is in about a 20-tick range through late European morning turnover. The freely accessible and liquid emerging market currencies are faring best today, led by the South African rand and Turkish lira. The JP Morgan Emerging Market Currency Index was nearly flat on the week coming into today. September WTI is stabilizing after falling nearly 4.5% over the past two sessions. It is off over 3% this week, the most since March, and the first back-to-back weekly loss since then as well. Gold is trimming yesterday's gains, but barring a deeper sell-off in North America, it is set to close higher for the fourth consecutive week. Iron ore extended its rally for a fifth consecutive session and is up a little more than 6% this week.  

Asia Pacific

BOJ Governor Kuroda's name refers to "black rice field." His predecessor, Shirakawa's name, means "white river."China's Deng Xiaoping observed that it doesn't matter if the cat is black or white, as long as it catches mice. Shirakawa was old-school and unimaginative. Kuroda has been bolder, bigger, and more activist. Yer neither has been able to generate sufficient price pressures to defeat the threat of deflation. Kuroda appears to have given up. Quietly and without much fanfare, he has scaled back JGB and ETF purchases. The BOJ tweaked its macro forecasts at today's meeting and provided more details about its green initiative. With the formal emergency extended until August 22 in Tokyo and social restrictions to continue elsewhere, the BOJ shaved this year's GDP forecast to 3.8% from 4.0% but boosted next year's forecast to 2.7% from 2.4%. Its inflation forecast was lifted to 0.6% this year from 0.1% and next year from 0.8% to 0.9%.  

There appeared to be three elements of the BOJ's green initiative. First, it will make loans at zero interest rates to fund green loans by banks. There had been some talk about offering negative rates, but reports suggest Japanese banks pushed back against such ideas, seeing interest rate margins squeezed further. Second, the BOJ will exclude related reserve requirements from negative rates. Thirdly, and most provocatively, the BOJ said it will buy foreign currency-denominated green bonds issued by Japanese names. In the past, the BOJ has rejected buying foreign currency bonds because it was difficult to distinguish it from intervention.  

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Read more by Marc on his site Marc to Market.

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