The Nikkei was up 4.9 per cent at 13514 during the official Tokyo session, rising towards 13700 during after hours trading; the Topix was up 5.2 per cent and the yen 1.1 per cent weaker at Y98.6. Sigh…
The reasons for this bout of vol might include:
- The first quarter GDP revision which should boost Abe’s already good chances in July’s upper house elections and comes ahead of the formal release of Abenomics’ third arrow, the longer-term growth strategy, on Friday
From the FT:
Government data released on Monday showed that the economy expanded at an annualised rate of 4.1 per cent between January and March, lifted by strong household spending and a pick-up in private residential investment. That was much higher than the preliminary estimate of 3.5 per cent, which was already the fastest rate recorded by any Group of Seven economy.
Table from BNP Paribas’ Japan team:
- Optimism about this week’s Bank of Japan meeting. From Nomura’s Yujiro Goto (his emphasis):
The BOJ meeting next week (June 10-11) is important for Japanese financial market as equity prices and the USDJPY started declining while JGB market remains unstable.
The BOJ is likely to consider extending the maturity of fixed rate fund supply operations against pooled collateral to 2- 3yrs from 1yr. The idea was discussed at the meeting with JGB investors. The 10y JGB yield topped out on May 23 and has been declining since then amid equity price declines. Nonetheless, volatility of JGB yields remained at a higher level than the level before the BOJ‟s historical decision on April 4 (Figure 1). The large spike in volatility is in the 3y to 10y sector and thus, supplying money into the market at fixed rate up to 3y can lower the volatility of 3y yields. The impact can feed into the 5-7y sector which has been the most volatile.
Providing money for three years at fixed rate can imply the BOJ is going to keep its zero interest rate policy for three years, potentially increasing the policy duration effect. However, it is unlikely for the Governor Kuroda will back off his commitment to achieve 2% inflation in two years, at this point, Thus, it is not clear whether policy duration effect can be strengthened or not. Expectations for the extension might already be high as some local media have reported the possibility and thus, if the extension is only up to 2y whose volatility is not elevated, positive impact to lower the volatility may be limited.
Or something else. The Nikkei had dropped 17 per cent on Friday from May 22nd after all.