Marketmind: Policy dilemmas in China, Japan

By Thomson Reuters Feb 19, 2024 | 3:49 PM

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

Trading activity in Asia should return to normal on Tuesday with China back in business following its Lunar New Year break and U.S. markets open after the Presidents Day holiday, with attention turning mostly to China and Japan.

Investors will be looking to see whether Chinese markets’ gradual climb out of the doldrums can continue, and whether Japan’s stocks and currency can break through to territory not seen in more than a third of a century.

Tuesday’s economic calendar is pretty light. The Reserve Bank of Australia releases minutes of its last policy meeting and China’s central bank delivers its latest interest rate decision.

The People’s Bank of China is expected to keep its benchmark one-year loan prime rate steady on Tuesday at 3.45% and cut its five-year rate, currently 4.20%, by 5-15 basis points to 3.95%. This latter rate influences mortgage rates.

Chinese stocks returned on Monday with a fairly decent performance – the Shanghai Composite rose 1.6% and the CSI 300 rose 1.2% – although given that Asian shares gained 2% during Lunar New Year, perhaps it wasn’t all that impressive.

Still, if the CSI 300 can close higher on Tuesday it will mark a sixth consecutive rise, something not seen since January 2023. Cautious optimism seems to be the prevailing mood, which Beijing will no doubt prefer to the outright gloom of late.

Many countries in Asia are experiencing a tightening of financial conditions, especially those with large dollar-denominated external debt and exposure to U.S. bond yields. But not Japan.

With stocks at the highest in 34 years, the yen near its weakest in 34 years, and domestic bond yields under 1%, financial conditions in Japan have rarely been looser.

Goldman Sachs’ Japanese financial conditions index last week sank to a 34-year low. This underscores the sliding yen/booming stock market nexus, and would appear to be inflationary.

The Bank of Japan might view this as reason to end negative interest rates soon and bring them into positive territory for the first time in more than eight years.

But the economy just unexpectedly slipped into recession, losing its position as third-largest in the world to Germany. Domestic demand is weak, and it is unclear whether wage growth next year will be as strong as it will be this year.

Will the BOJ move on rates soon? Or intervene on behalf of the Ministry of Finance to shore up the yen? It’s a tricky one to navigate.

More focus than usual could be placed on Japan’s 20-year bond auction on Tuesday, after surprisingly strong demand from pension funds in a 10-year sale recently. A sale of 12-month bills on Monday, meanwhile, resulted in the first positive yield at auction since October 2014.

Here are key developments that could provide more direction to markets on Tuesday:

– Australia central bank minutes

– China interest rate decision

– Malaysia trade (January)

(By Jamie McGeever)