Aurelia Butler

The writer is an FT contributing editor and global chief economist at KrollThe Bank of Japan shocked markets in December by widening the band in which 10-year government bonds could trade from 25 to 50 basis points. Investors responded by pushing two- to 10-year yields to their highest since 2015, betting that the widening was the first step in ending yield curve control, the bank’s pledge to buy as many bonds as necessary to cap borrowing costs. Yet BoJ governor Haruhiko Kuroda was at pains to say it was simply an effort to aid market functioning rather than a signal of a policy change ahead. Why? Yield curve control was introduced in 2016 to boost economic activity and spur inflation. Japan now has inflation consistently above its 2 per cent target. The core inflation rate (excluding fresh food but including energy) rose to 3.7 per cent in November — the highest in 40 years. It’s time for the BoJ to summon up the courage to change course. Based on the experience of other central banks that will be painful, with investor losses and market ruptures. The longer the wait, the worse those may be. Because liquidity in some Japanese government bonds is already thin, at a time when global liquidity is falling, market dislocations may be bigger and swifter than usual. The BoJ should push ahead anyhow.Markets, so far, seem to agree. JGB futures show investors expect the 10-year trading band to widen by another 50 points this year. Index swaps, a market the BoJ doesn’t influence directly, show they have also priced in 24 basis points of rate rises. The BoJ now owns more than half of the outstanding JGB issuance. That’s already thinned trading in the 10-year. If investors continue to challenge the BoJ, it will eventually have to buy all the bonds or give up.Meanwhile, implied volatility for 10-year JGBs over the next 12 months is roughly three times what it was a year ago. The yield curve is kinked, with the 10-year yield falling below 9- and 11-year yields. That affects commercial bank profits, creating a disincentive to lend, potentially sapping growth.The government of Prime Minister Fumio Kishida has suggested it will call for a BoJ policy review when Kuroda retires in April. That’s another reason for the central bank to act now. Markets will digest a policy change more smoothly under a seasoned governor with credibility than an inexperienced successor. Just ask members of the then-brand new Mexican government that widened the band in which the peso could trade in 1994, kicking off the tequila crisis.One counter argument is that Japan’s inflation is unsustainable. As elsewhere, the current rise was driven by global energy and food prices and a weak currency — so-called cost-push inflation. BoJ officials contend deflation won’t be vanquished until wages rise faster, but this year’s spring shunto trade union pay negotiations are expected to bring larger wage increases to compensate for higher inflation. This would generate the kind of demand-pull inflation that the BoJ wants to see.The BoJ should also tighten policy before many developed economies are pitched into recession later this year. Risk-off markets tend to spark a flight to quality into yen. Shifting the policy stance as the global economy weakens would reinforce yen appreciation, dragging on Japan’s export competitiveness and contributing to disinflation.History suggests ending yield curve control won’t go smoothly. The Federal Reserve capped yields to finance the US war effort from 1942 to 1951. That YCC lulled businesses into assumptions about interest rates and their volatility that broke down when the caps ended, causing losses for investors holding longer-term bonds and sharp dislocations in mortgage markets. The Reserve Bank of Australia practised YCC from March 2020 to November 2021. In a postmortem of its policy, the RBA admitted keeping it in place after market participants stopped believing in it meant “the exit in late 2021 was disorderly and caused some reputational damage to the Bank”. To minimise disorder, the BoJ should be clear about its reaction function and move slowly but deliberately by first further widening the YCC band or targeting a shorter duration. Ultimately, it must announce that it is abandoning YCC entirely and will instead aim to minimise rapid changes in debt prices, such as those seen in the UK government bond market in September. It is inevitable that there will be market spillovers. But the BoJ must stay the course, barring any kind of systemic meltdown. It’s time for it to join every other major central bank in moving to end extraordinary monetary policy. More

Among 22 cities selected by the China Index Academy, the average daily floor area of homes sold rose 27.1% from last year’s holiday season.”Home buyers’ visits to housing showrooms increased in some cities,” said the academy. “Pent-up demand due to the impact of the epidemic in December was released during the New Year’s holiday after the infection passed its peak in some cities.”The firm also said major cities such as Beijing and Shanghai saw a rise in sales compared with last year’s New Year holiday but sentiment remained at low level in most small cities.Compared with last year’s holiday season, home sales rose 80% in Beijing, 74% in Shanghai and 131.5% in Guangzhou.China’s property market crisis worsened in 2022, with official data showing home prices, sales and investment all falling in recent months, putting more pressure on the faltering economy.Policymakers have ramped up support for the industry in a bid to relieve a long-running liquidity squeeze that has hit developers and delayed completion of many housing projects, further undermining buyers’ confidence. The moves included lifting a ban on fundraising via equity offerings for listed property firms.New-home prices in the 100 Chinese cities monitored by the firm fell 0.02% year-on-year in 2022, the first decline since 2015, the real estate research firm said.Home transactions fell nearly 40% year-on-year in 2022, the lowest since 2015.”For 2023, home sales likely grow slightly under optimistic expectations, while under pessimistic expectations, the market adjustment trend may continue with new housing construction starts and investment still facing downward pressure,” the firm said.(This story has been corrected to change the year to 2023, not 2013 in the last paragraph) More

JAKARTA (Reuters) – Indonesia recorded a 464.3 trillion rupiah ($29.77 billion)fiscal deficit in 2022, or 2.38% of gross domestic product, based on unaudited data, Finance Minister Sri Mulyani Indrawati said on Tuesday, much smaller than originally forecast.The government had initially planned for a budget deficit of 4.85% of GDP. Revenue collection, however, got a boost from higher commodity prices and the easing of COVID restrictions last year, prompting the government to revise down the deficit forecast several times.The latest figure was below a forecast on Dec. 21, when President Joko Widodo said he expected a 2.49% deficit, and means fiscal consolidation has been faster than planned.By law, the government has room to spend more, with a legal budget deficit ceiling of 3% of GDP waived for three years from 2020 to allow for a pandemic response.Southeast Asia’s largest economy likely grew 5.2% last year, Sri Mulyani told an online news conference. Economic growth in 2021 was 3.7% and the government is targetting a 5.3% GDP expansion this year.Indonesia recorded 2,626.4 trillion rupiah of revenue last year, up 30.6% from 2021 and about 16% bigger than the target, the minister said.The government spent 3,090.8 trillion rupiah, slightly below the planned amount and representing 11% growth from the previous year.Of that, 551.2 trillion rupiah was spent to subsidise fuel prices and power tariffs. This was also below previous official estimate.The government raised subsidised fuel prices by about 30% in September due to budget pressures stemming from high global energy prices. At the time, authorities said the fuel price hike would cut the energy subsidy budget by some 48 trillion rupiah, bringing the total estimated budget to 650 trillion rupiah.Given the strong 2022 financial position, Sri Mulyani has said she would carry over any excess cash to reduce borrowing in 2023.She did not disclose the amount of excess cash by the end of 2022, but reiterated a commitment to “optimise” the fund “to anticipate financing needs amid global economic uncertainties”.Indonesia expects a fiscal deficit of 2.84% of GDP in 2023.($1 = 15,595.0000 rupiah) More

The China Securities Regulatory Commission (CSRC) in a statement on Tuesday said it will fully pay attention to the necessity for, and rationality of, securities firms’ financing, as part of its vetting process.The comments come as Huatai Securities, one of China’s biggest brokerages, said on Friday it plans to raise 28 billion yuan ($4.07 billion) in A-share and H-share rights issue.The CSRC said it has noticed a “certain listed brokerage firm’s refinancing activity” and encourages brokers to focus on their main business, capital-saving and high-quality development.Listed brokers should reasonably determine the financing plan and method, and safeguard the legitimate rights and interests of all types of investors, especially small and mid-sized investors, the regulator said.The CSRC also said it supports reasonable financing for securities companies.Huatai Securities did not reply to a phone call and an email seeking comment.Shares of Huatai slumped 6.7% in Shanghai and 2.6% in Hong Kong as markets reopened after New Year holidays.Huatai planned to use proceeds from the placement to replenish capital as well as for working capital, including for developing its margin financing and securities lending business and its fixed income, equity and over-the-counter derivative business, and also to fund subsidiaries.There is a risk of dilution of returns after the placement as the company’s capital stock will increase, Huatai said, adding the share issue plan has to be approved by the regulator.($1 = 6.8845 Chinese yuan renminbi) More

Among 25 districts in Seoul, only four will remain on the finance ministry’s “speculative area” list starting from Thursday, the ministry said. It currently consists of 15 districts.Those to remain on the list are Yongsan-gu, Seocho-gu, Gangnam-gu and Songpa-gu, in which stricter mortgage rules and heavier taxes are imposed on home buyers. The decision comes a day after South Korean President Yoon Suk-yeol promised to keep easing restrictions on home buyers to achieve a soft landing of the property market. More

SEOUL (Reuters) -South Korea’s Hyundai Motor Co and affiliate Kia Corp forecast on Tuesday that their combined global sales will jump nearly 10% in 2023, even as last year’s sales fell short of target due to supply chain disruptions. The companies sold 6.85 million vehicles in 2022, about 4% less than their combined target of 7.16 million vehicles, largely due to problems including chip and component shortages.They said they would target global sales of 7.52 million vehicles this year.”Hyundai plans to expand market share and operate profitability-oriented businesses by flexibly responding to market changes, accelerating its transition to electrification, responding to global environmental regulations, and optimising production, logistics and sales by region,” Hyundai Motor said in a statement.Analysts said the sales targets of the two companies for this year appear to be aggressive but achievable, considering pent-up demand for vehicles. “Hyundai Motor and Kia are still seeing relatively higher back orders of vehicles and car buyers are still waiting in line to buy cars despite the recent economic environment…with that demand in the picture, the companies appear to be confident,” said Kim Gwi-yeon, an analyst at Daishin Securities.Kim, however, added that economic obstacles such as high interest rates could dampen car sales, especially in the second half of the year after pent-up demand softens. Shares of Hyundai Motor and Kia closed up 1.3% and 1.5% respectively, versus a 0.3% fall in the benchmark market KOSPI.In October, Hyundai Motor cut its 2022 global sales target by about 7% to 4.01 million vehicles from 4.32 million vehicles. More

President Tayyip Erdogan’s unorthodox low interest-rate monetary policy and a resulting currency crisis pushed inflation to a peak of 85.5% in October before dipping slightly in November.Consumer prices rose 1.18% month-on-month in December, the Turkish Statistical Institute said, below a Reuters poll forecast of 2.7%. The forecast for annual consumer price inflation was 66.8%.The biggest monthly consumer price increases were seen in the health sector, up 5.91%, while key food and non-alcoholic drink prices were up 1.86%. Transport prices dropped 4.14%.The base effect that drove the decline in annual inflation from November was a 13.6% month-on-month surge in consumer price inflation in December 2021.Despite soaring prices, the central bank has slashed its policy rate by 500 basis points since August to 9%, citing an economic slowdown. The easing was part of Erdogan’s economic programme prioritising exports, production, investment and employment.The lira was unchanged at 18.7255 against the dollar after the data was released.The lira shed 44% of its value against the dollar in 2021, most of it during a December currency crisis sparked by rate cuts. It shed another 30% in 2022 to historic lows but held mostly stable in the last quarter.The Reuters poll showed inflation was expected to remain elevated this year, ending 2023 at 43.2%, nearly twice the level forecast by the government and raising the prospect of continued cost-of-living strains as Turks vote in presidential and parliamentary elections by June that are expected to be tight.The domestic producer price index was down 0.24% month-on-month in December for an annual rise of 97.72%. More

Lee Buchheit is a professor of law (Hon.) at the University of Edinburgh.A modern sovereign debt restructuring can be expected to unfold more or less as follows:• The debtor country approaches the IMF for a program.• The Fund staff prepares a Debt Sustainability Analysis (DSA).• If the DSA pronounces the country’s debt as “unsustainable,” the IMF staff will insist that it promises to restructure its financial liabilities in order to meet specified “Debt Sustainability Targets” (such as an average annual gross financing needs target; a target debt-to-GDP ratio; a cumulative debt service reduction target, etc.).• The IMF staff and the country then negotiate the terms of an IMF adjustment program, with the terms memorialised in a “staff level agreement” (SLA).• But the Fund staff will not take the draft program to the IMF’s Executive Board for approval unless and until the country’s bilateral and commercial creditors provide the Fund with assurances that they will restructure their debts in a manner consistent with the program. In IMF-speak, these are called “financing assurances.”But why?The ostensible justification for the IMF’s insistence on receiving financing assurances from a country’s existing creditors is to be found in the Fund’s Articles of Agreement. FTAV’s emphasis below:Section 3. Conditions governing use of the Fund’s general resources (a) The Fund shall adopt policies on the use of its general resources, including policies on stand-by or similar arrangements, and may adopt special policies for special balance of payments problems, that will assist members to solve their balance of payments problems in a manner consistent with the provisions of this Agreement and that will establish adequate safeguards for the temporary use of the general resources of the Fund.As an institution that lends fresh money into visibly distressed situations, it is entirely understandable that the IMF would want the debtor country’s existing lenders to agree to moderate their claims against the borrower before the new money is disbursed. After all, the IMF should not wish to see its money bleed out to pay existing creditors in full. Of equal importance, the Fund wants to ensure that its programs will have a reasonable change of succeeding. When the country is assessed as carrying an unsustainable debt load, that success will require an adjustment to existing liabilities.The pig-in-a-poke dilemmaThe problem is not that the Fund seeks financing assurances from existing lenders. No commercial lender into a distressed corporate situation would do otherwise. The problem resides in when and how those financing assurances are sought.Let’s start with the when. The IMF staff asks both bilateral and commercial creditors to provide financing assurances before the staff will take the proposed program to the Fund’s Executive Board for approval. The IMF’s financing assurances policy took this form in the early 1980s at the commencement of the Latin American debt crisis. In that era, bilateral sovereign creditors were members of the Paris Club and commercial bank lenders were represented by a Bank Advisory Committee. Back then, it was thus a relatively easy task to seek assurances from both groups that they would provide the debt relief needed to fill any financing gaps projected in the Fund’s adjustment program for the country. By 1989, however, it had become clear that commercial banks were using the Fund’s financing assurances requirement as leverage to secure concessions from the sovereign debtors. As it related to commercial creditors, the Fund therefore substantially diluted its financing assurances policy. Financing assurances from commercial creditors are now satisfied if the sovereign borrower commits to negotiate in good faith with its commercial lenders. In other words, a promise by the debtor to negotiate with its private sector lenders is deemed an assurance from those creditors that they will accept the results of that negotiation, whatever it may be. The Fund continues to insist, however, on receipt of affirmative financing assurances from bilateral creditors. Over the last twelve years the Paris Club’s share of bilateral lending has been dwarfed by non-Paris Club bilateral lenders, principally China. Financing assurances must now be solicited from two bilateral creditor groups — Paris Club and non-Paris Club bilaterals like China. And if receipt of financing assurances is a precondition to the Executive Board’s consideration of a program, a bilateral creditor like China that may not relish the prospect of a debt restructuring can forestall that event — pretty much indefinitely — simply by withholding its financing assurances to the IMF staff.Now for the how The lenders asked to give these financing assurances are never told exactly what they are, in principle, signing up for. The debt sustainability targets contained in the DSA will be expressed as being applicable to the entirety of the country’s debt stock. The Fund’s sensibilities forbid it from indicating in the DSA or in the program how much of the required debt relief should be borne by each class of lender; the Fund insists that this is a matter to be worked out between the country and its various creditors. The phrase “financing assurances” might suggest that each creditor group is being asked to confirm that it will contribute a quantum of the prescribed debt relief proportionate to its share of the overall debt stock. But this is only an implied meaning. Financing assurances could just as easily connote an undertaking to provide debt relief commensurate with a creditor group’s share of the debt stock and sufficient to cover any deficiency in the debt relief provided by other creditors. Moreover, some lenders may feel that other creditors should provide a disproportionate share of the debt relief. Scratch a Paris Club creditor, for example, and just under the surface you will probably discover a profound belief that bilateral creditors — lending at below market interest rates — should be given preferential treatment in any debt restructuring with the lion’s share of any needed debt relief coming from those irredeemably avaricious commercial lenders. What then is a bilateral creditor so minded really saying when it assures the IMF that it will provide appropriate debt relief?Finally, what does the phrase “financing assurance” mean in the context of a country like Sri Lanka or Ghana, where roughly half the debt stock is comprised of domestic (local currency) obligations? Everyone knows that great caution must be exercised in seeking debt relief from local creditors for fear of destabilising domestic financial institutions, pension funds and insurance companies. In a country with a sizeable slug of domestic debt, does “financing assurances” therefore mean debt relief commensurate with each external creditor group’s share of the foreign currency debt stock plus some portion — how much? — of the domestic debt stock?The fixThere is an obvious solution. Instead of asking lenders to give financing assurances as a condition to taking a program to the IMF’s Executive Board, let the Board approve the program but withhold any significant cash disbursements until existing lenders have agreed to provide the needed debt relief. This would (i) adequately safeguard Fund resources, (ii) put pressure on the debtor and the existing lenders to come to definitive terms on the debt restructuring or risk a cancellation of the program and (iii) deny to any one large creditor or creditor group the ability to stymie the process by withholding its financing assurances. Moreover, the IMF has well-established policies (called “Lending Into Arrears”) that address the problem of recalcitrant legacy creditors after the Board approves a program for the country.The potential timing delay inherent in the Fund’s current practice regarding financing assurances is more than just an inconvenience. At the time of signing a Staff Level Agreement, the debtor country authorities are often asked to implement “prior actions” before the program goes to the IMF’s board for approval. Some of those prior actions, such as raising taxes, can be politically toxic. It can therefore leave the authorities in an uncomfortably exposed position if the country swallows some bitter medicine but finds that one creditor can in practice still indefinitely delay the program by withholding financing assurances. More