Aurelia Butler

The country’s current account balance logged a deficit of $4.52 billion in January, after a $2.68 billion surplus in December, according to the Bank of Korea (BOK). It was the biggest monthly deficit since the data series started in 1980.The balances of goods and services each posted a deficit of $7.46 billion and $3.27 billion, with a drop in exports and jump in travel outflows, although the surplus in primary income widened to $6.48 billion. Data out earlier this month showed the country’s trade deficit more than halved to $5.30 billion in February from a record $12.65 billion in January, suggesting an improvement in the current account.Vice Finance Minister Bang Ki-sun said after the data release that the government would continue efforts to improve exports and seek ways to boost domestic travel, while citing dividend payouts as a factor to cause volatility in the account in the first half of 2023.The BOK expects the current account to log a $26 billion surplus in 2023, narrower than $29.83 billion in 2022. (This story has been corrected to say 2023, instead of 2022, in paragraph 5) More

Londoners and people living in south-east England are 55 per cent more likely to struggle to pay their mortgages than those living elsewhere in the UK, new data shows, highlighting the uneven effect of the cost of living crisis. The Financial Conduct Authority said on Friday that 5.9 per cent of the 1.8mn mortgage holders in London and the South East were at risk of being “financially stretched” by mid-2024. According to the regulator, people who are financially stretched have a mortgage costing them more than 30 per cent of their gross income. The findings highlight the vulnerability of Londoners’ living standards to high housing costs. In the latest data, median incomes in the capital are no higher than the rest of the country when measured after housing costs. The share of mortgages at risk of default across the UK, excluding London and the South East, is 3.8 per cent, with the lowest rates in the poorest regions where house prices have traditionally been lower, including north-east England (2.3 per cent), Northern Ireland (2.4 per cent) and Scotland (2.8 per cent). The FCA released the figures as it finalised guidance for banks to support at-risk borrowers, including proactively contacting them about options to help them avoid default. The watchdog said banks reached out to 16.5mn customers to offer support last year and expects this number to rise to 20.5mn in the next 12 months. “Our research shows most people are keeping up with mortgage repayments, but some may face difficulties,” said Sheldon Mills, FCA executive director of consumers and competition, adding that those worried by default should contact their banks sooner rather than later. The picture on at-risk mortgages nationwide has improved to 356,000 from the 570,000 predicted last autumn. The FCA said the 570,000 figure was based on interest rate expectations in September 2022, when the bank rate was forecast to peak at 5.5 per cent. Its latest data was calculated on expectations that rates would now peak at 4.5 per cent. The FCA findings that London-based households with mortgages are more likely to be financially stretched match a range of recent surveys showing that living standards in the capital are no longer higher than average.

Official figures show that although households in London have higher average incomes after tax than any other region or nation in the UK, once rent or mortgage interest costs are deducted, their level of disposable income is no higher than average. Income growth in the capital has also ceased to rapidly outpace other parts of the country, and productivity growth rates have been below average in the UK since the 2008-09 financial crisis. In a report last week, the Centre for Cities blamed the slowdown in London’s productivity growth for a disproportionate amount of the overall weakness of the UK economy since the crash 15 years ago. The think-tank said a lack of housing affordability in the capital was preventing skilled people from moving there, hitting the value of output per hour worked. More

The writer is a former global head of asset allocation at a fund managerTime and time again, betting against Japanese government bonds has cost traders untold fortunes. The pay-off for going short on JGBs has always looked tempting and risks asymmetric. Potential losses appear limited given that yields, which move inversely to prices, cannot go too far into negative territory. At the same time, returns could be large as yields can rise a lot. This opportunity has almost always proved a delusion. Forecasts for inflation and bond yields in Japan to rise from long depressed levels have consistently proved misplaced.But with the return of inflation in the country, higher bond yields around the world, and new leadership at the Bank of Japan, is this time different? One reason to believe so is that yields are now being held down by the BoJ’s policy of capping government borrowing costs through massive bond purchases.This policy, known as Yield Curve Control, is incompatible with any central bank’s ultimate economic objectives. These involve getting firms and households to change their savings and borrowing behaviour, anchoring inflation expectations in positive territory — that sort of thing. To do this, interest rates need to be free to adjust to economic conditions, the opposite of pegged yields under YCC. There will be moments when a static bond yield curve happens to deliver something consistent with inflation targets, but these will be transitory. Achieving the central bank’s ultimate objectives can only mean breaking the peg when the time comes to prevent inflation overshooting targets.

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We’ve seen this film before. In 1942 the US Federal Reserve implemented its own version of YCC during the second world war, abandoning it only in 1951. Until then a 2.5 per cent yield ceiling remained in place for long-term Treasuries, with progressively lower caps for shorter-term bonds. More recently, the Reserve Bank of Australia had a brief affair with yield curve targeting during the Covid-19 pandemic. Rather than targeting the entire curve, the RBA’s policy between March 2020 and November 2021 was to keep the three-year government bond pinned to a 0.25 per cent yield — later reduced to 0.1 per cent. The experiences of the two central banks are similar in many ways. When expectations began to shift, the yield targets became ultimately unsustainable. In both cases, the central banks struggled to extricate themselves from a policy no longer appropriate for their economies and increasingly tested by twitchy bond traders.But there are important differences too, the most relevant of which concern the manner of policy exit. The Fed sought to defend its peg for several quarters, and in so doing outsourced the creation of its reserves to the whims of investor demand. When investors sold bonds, the Fed had to buy them to maintain the yield peg. To buy these bonds, the Fed created fresh bank reserves. As such, in committing to a peg, the central bank passed control over the volume of reserves to private actors in the bond market. This made for bad monetary policy, exacerbating inflation and it led to an institutional crisis. By contrast, the RBA’s defence of its targets crumbled relatively quickly. When the RBA changed tack, three-year bonds yielded more than seven times their target rate despite the central bank having bought 60 per cent of the bonds in question.Are there lessons for Japan? Bond traders are probing the BoJ’s commitment, and the JGB market is increasingly broken and dominated by the central bank’s holdings. Today policy rates in Japan are negative, although markets are pricing in expectations for them to rise a full 0.15 percentage points by year-end, and progressively thereafter. The market may be wrong, but it is betting that the decades-long battle against deflation is over and the YCC policy no longer appropriate.The financial stability risks of a break higher in JGB yields may lean more towards “slow burn” than “market chaos” — with the biggest impact perhaps felt in further diminishing Japanese demand for overseas government bonds. Yes, there will be paper losses for the BoJ as rates rise. But these are unlikely to translate into realised losses under the BoJ’s accounting rules, given their treatment of bonds held to maturity. And the maturity profile of the BoJ’s portfolio is surprisingly short, giving it flexibility to respond to conditions by adjusting its balance sheet by deciding whether and how to reinvest proceeds from maturing bonds. But the BoJ should never have adopted YCC in the first place. Its unravelling was inevitable.Tony Yates contributed to this column   More

The Netherlands is considering whether to allow maintenance of Dutch-made machines for making advanced semiconductors and exported to China despite a ban announced this week on sending new models.Liesje Schreinemacher, the trade minister, told journalists she had not yet decided on whether to permit servicing and replacement parts for existing machines after the clampdown on exports designed to restrict Chinese access to the most powerful semiconductors.The Hague is under pressure from the US to starve Beijing of the latest technology, while China has been lobbying it to keep supply lines open.Schreinemacher, speaking to reporters ahead of an EU ministerial meeting in Stockholm, said the “details still need to be worked out”.“The Chinese have asked us before . . . to not disturb value chains much when it comes to chips. And, of course, servicing is an important part when you have a machine. We do take those concerns very seriously.”She told the Dutch parliament on Wednesday that the government would introduce export controls on the “most advanced” machines because they could produce chips for sophisticated weapons. That would include some of the deep (DUV) immersion lithography tools made by Dutch company ASML, which would need licences for sale overseas. The government has never allowed the export of the most capable extreme (EUV) machines to China. ASML said it believed the new curbs would include the Twinscan NXT:2000i, which was first shipped in 2019, and later models that make high- capability chips.Schreinemacher said she would outline the full details of the regime before the summer. The deal was agreed with the US and Japan in January but the controls do not go as far as those imposed by Washington, which is trying to increase its technological lead over China.Tokyo has not yet made an announcement on its new measures. The Dutch minister denied the US had pressured her government. “This decision was really a unilateral decision. It was not a tit-for-tat deal,” she said.

However, she called for an increased role for the EU in co-ordinating export controls. National governments are in charge of them because they are a matter of national security. She said Brussels should amend its regulations this year so that member states can all choose to adopt the same restrictions.“I think to show that we are one united European Union and show that we are a geopolitical bloc, it would be preferable if all member states would adopt this legislation,” she said, although no others can make the most advanced chipmaking machines. The EU’s trade commissioner said on Thursday that he also favoured greater co-operation between the 27 member states. Valdis Dombrovskis said he was consulting them on an “EU approach”. “Russian aggression in Ukraine highlighted the risks of member states adopting national controls without much co-ordination to address their pressing national security considerations,” he said. “We need a stronger EU role to ensure coherence in our policy on security, trade and technology.” He said it was also necessary to ensure that member states did not undercut each other, with one sending products to a third country that were banned by another. He acknowledged that it was a “very sensitive matter”.Schreinemacher made clear that decisions should remain with national governments. “There are Dutch real economic interests involved as well,” she said. She was not prepared to “put them in a basket for Europe to negotiate with . . . That’s why I believe it’s a national competence.” More