☀️☕️ NIRP and ZIRP is Dead! EARN interest on ¥Deposits?!

📊 Also: Kering/Gucci luxury warning; Big Bang for US Homes 🎓 Japan’s Yield Curve Control

📈 Market Roundup [20-March-24]

US large-cap S&P 500 closed 0.56% UP ▲

Tech-heavy Nasdaq Composite closed 0.39% UP ▲

Pan European STOXX Europe 600 closed 0.26% UP ▲

HK/China's Hang Seng Index closed 1.24% DOWN 🔻

Japan's broad TOPIX closed 1.06% UP ▲

📝 Focus

  • NIRP and ZIRP is Dead! EARN interest on ¥Deposits?!

📊 In the Markets

  • Kering/Gucci luxury warning; Big Bang for US Homes

📖 MoneyFitt Explains

  • 🎓 Japan’s Yield Curve Control

💸 Personal Finance Corner

📝 Focus

NIRP and ZIRP are Dead! EARN interest on ¥Deposits?!

The Bank of Japan (BOJ) finally ended eight years of negative interest rates policy (NIRP) and its unorthodox and unpopular yield curve control🎓 on Tuesday, a historic policy shift away from decades of trying (largely in vain) to pump up growth with massive monetary stimulus. Though Japan has had its first rate hike in 17 years, interest rates actually remain barely above zero given a still fragile economic recovery, so significant further increases may still be some way off.

“We reverted to a normal monetary policy targeting short-term interest rates, as with other central banks,”

BOJ Governor Kazuo Ueda

Japan is the last central bank to exit negative rates, signalling the end of an era of cheap global money and unconventional tools to spur growth. BOJ Governor Kazuo Ueda will now use monetary policy targeting short-term interest rates. In other words: normal. The move replaces the 0.1% charge on excess reserves parked at the BOJ since 2016 with the policy (overnight call) rate in a 0-0.1% range. 

Paying 0.1% interest on deposits (partly) isn’t much, but any kind of policy normalisation does reflect the confidence that Japan has finally overcome decades of economically destructive deflation (below). Though it is finally discontinuing yield curve control🎓 and ETF purchases, the BOJ will keep buying government bonds (JGBs) to maintain loose (but no longer ultra-loose) financial conditions and prevent a damaging spike in borrowing costs that could derail Japan’s still fragile growth.

Yay, 0.1% p.a. interest rates - Image credit: Yuuki Yuuna is a Hero / Studio Gokumi via Tenor

..... ▷ With inflation exceeding the 2% target for over a year and large industrial wage hikes signed, expectations for an end to negative rates were high. 

The long-awaited decision nevertheless came a bit earlier than expected, boosting sentiment and keeping momentum in Japanese shares firmly upward. 

However, the Yen weakened against the US dollar in what appears to be a “buy-on-rumour-sell-on-news” move.

..... ▷ The focus now shifts to when or whether the BOJ will raise rates further given that “accommodative financial conditions will be maintained for the time being.” 

If inflation, on the decline in other major economies, picks up for reasons other than domestic demand pull, the hikes will come. 

The trouble is that Japanese businesses and households have become dependent on low-interest rate loans. Zombie companies may fold with rates at anything much above zero, while many consumers have variable-rate mortgages with payments that would (obviously) go up on interest rate increases, squeezing out nascent consumption spending.

Will there be a US$3.3 trillion tsunami of Yen invested overseas heading home? - The Day after Tomorrow (2004) / 20th Century Fox via Tenor

..... ▷ As we’ve written many times in the last year, the BoJ has been one of the most significant sources of easy money in the world, unleashing $3.3 trillion of Japanese cash into the investment industry.

An early hint of the potential “great repatriation” of Japanese investment flows as the carry trade starts to unwind seems to be (at least partially) behind the equity bull market. If this accelerates, domestic asset prices may continue rising while the rest of the world faces an extra tightening factor as easy money Yen flows home. 

Deflation - a mini-explainer

  • Deflation is the opposite of inflation, not just a falling rate of inflation but an actual decrease in the general price level of goods and services. 

  • This may sound good, but can be as damaging or even worse than high inflation, as buyers may sit on the sidelines and wait for lower prices, thereby sending economic activity through the floor. 

  • Meanwhile their real (inflation adjusted) debt burden actually goes up.

📊 In the Markets

On Tuesday, Wall Street's major indexes closed higher as Nvidia's shares rebounded from early losses to close up 1.1%, with investors awaiting the conclusion of the Federal Reserve's policy meeting on Wednesday.

We just wanna party / Party just for you / We just want the money / Money just for you - Image credit: This is America / Childish Gambino via Tenor

French luxury group Kering issued a profit warning, with weak sales at its main brand Gucci dragging down group revenues. Gucci, accounting for two-thirds of group operating income last year, is undergoing a turnaround under new creative director Sabato de Sarno. The new quiet luxury collections were only launched in February and have been well-received, and Kering did recently flag that it would be investing in Gucci and that margins would take a hit in 2024. 

This does give Kering some cover compared to strong performance by rivals LVMH and Hermès. Both recently posted double-digit sales growth despite the luxury market's slowdown to an estimated 5% growth this year (with poor consumer confidence and discretionary spending in China) after growing at 10% a year since 2016. Kering, controlled by François-Henri Pinault, has almost halved since its peak in early 2021, massively underperforming its peers, reflecting its more aspirational (read: price sensitive) customer base. 

Big Bang for US Homes

A group of US homebuyers reached a $418 million settlement with the National Association of Realtors, targeting rules that critics say inflate housing prices. Changes include ending the standard 6% selling side-only commissions, making agent commissions competitive and negotiable, and banning anticompetitive broker tactics. 

Buying brokers will likely now have to be paid directly (instead of getting a share from the selling side) but overall, the settlement is expected to reduce home buying costs by thousands of dollars, likely leading to increased affordability as broker rates become competitive and potentially saving buyers billions annually. CNN reports that for a median-priced American home of $387,000, brokerage fees of over $23,000 could drop by up to $12,000.

The removal of fixed commissions echoes changes in financial markets decades ago, reflecting the oligopolistic nature of the real estate industry and the self-serving industry inertia of “it’s always been that way” thinking. As with the UK’s “Big Bang” deregulation of commissions, over a decade after the NYSE’s own “Mayday”, it’s hard to see how commissions can continue to stay up at such elevated levels relative to value-add and marginal costs once competition is permitted.

Phil’s not too worried - Image credit: Modern Family (2009-20) / ABC via Tenor

Big Bang - Reforms in The City -  financial industry geek corner

The City (the UK's financial sector) had its “Big Bang” in 1986, though it came as part of a series of regulatory and market reforms that occurred in the 1980s. The reforms aimed to modernise and deregulate the financial industry, promoting competitiveness and innovation. 

One significant change was the abolition of fixed commission rates, allowing brokerage firms to set their own rates. Previously, commission rates were fixed by the London Stock Exchange, leading to inefficiencies and limited competition. With the removal of fixed rates, brokerage firms could compete on pricing, leading to increased competition, lower costs for investors, and the emergence of new financial products and services. 

The City of London was an established global financial hub well before these reforms, but the Big Bang played a crucial role in accelerating its growth. Prior to the reforms, London was characterised by traditional practices, not only fixed commission rates but also restrictions on trading hours and other practices, which limited its competitiveness against other financial centres, particularly New York. 

Fixed stock commissions on the New York Stock Exchange (NYSE) were deregulated over a decade earlier on May 1, 1975 – often referred to as "Mayday" by (very) old-timers.

The UK’s Big Bang reforms removed many of these barriers, leading to an influx of international investment, increased trading activity and a boom in London's financial services industry.

📖 MoneyFitt Explains

🎓️ Japan's Yield Curve Control

Yield curve control (YCC) was a policy by the Bank of Japan (BoJ) in which the central bank targeted government bonds of different maturities to keep the yield on those bonds within a specified target range.

YCC was introduced by the BoJ in 2016 as an unconventional (sometimes controversial) monetary policy to influence long-term interest rates in order to stimulate economic growth and achieve price stability (as buying JGBs in its "Quantitative Easing" was insufficient.) It was finally shelved in 2024. 

Critics argue that YCC was effective in achieving these goals and that the BOJ's efforts to manipulate interest rates distorted financial markets and led to unintended consequences.

(A yield curve is a visual representation of interest rates for different debt maturities. It shows the yield an investor would get when lending money over several different periods. A “normal” one is upward-sloping.)

💸 Personal Finance Corner

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