BOJ is Wedged Between a Rock and a Hard Place

By Michael Lebowitz and Lance Roberts | October 25, 2022

The Bank of Japan (BOJ) is intervening again in its currency market to prevent more depreciation. FT reports that the BOJ spent at least $30 billion to support the yen last Friday. That is on top of an estimated $20 billion in September. The BOJ’s simultaneous support of the yen and the bond market, which is QE, is counterintuitive. The BOJ is capping ten-year bond rates at 0.25%. It is attempting to save banks and insurance companies from significant losses by preventing yields from moving to market levels. The BOJ’s dovish monetary policy, while other central bankers are incredibly hawkish, is a crucial factor behind rapid yen depreciation. The BOJ is between a rock and a hard place. Either let the yen depreciate more or let yields rise. Trying to run policy in two completely opposing directions will prove impossible.

Why should we care? Likely, the BOJ is selling UST bonds, particularly 30-year bonds, to support the yen. While the selling is intense, it is temporary. Further, it is creating odd dislocations in the U.S. bond market and other markets. Such aberrations are likely to normalize quickly once the BOJ stops selling.

boj in trouble

What To Watch Today


  • 9:00 a.m. ET: FHFA Housing Pricing Index, August (-0.6% expected, -0.6% prior)
  • 9:00 a.m. ET: S&P CoreLogic Case-Shiller 20-City Composite, MoM, August (-0.80% expected, -0.44% prior)
  • 9:00 a.m. ET: S&P CoreLogic Case-Shiller 20-City Composite, YoY, August (14.10% expected, 16.06% prior)
  • 9:00 a.m. ET: S&P CoreLogic Case-Shiller U.S. National Home Price Index (15.77% prior)
  • 10:00 a.m. ET: Conference Board Consumer Confidence, October (106 expected, 108.0 prior)
  • 10:00 a.m. ET: Conference Board Present Situation, October (149.6 prior)
  • 10:00 a.m. ET: Conference Board Expectations, October (80.3 prior)
  • 10:00 a.m. ET: Richmond Fed Manufacturing Index, October (-5 expected, 0 prior)


Market Trading Update

The market rallied yesterday, providing some needed follow-through after the retest of support at the 20-dma. The market did breach the next resistance level at 3800 yesterday but was rejected into the close. Today, the earnings crush is on as GOOG and MSFT report earnings. If this market is going to continue this reflexive rally, we need a break and close above 3800, which will open up a rally to the 50-dma, as shown. With buybacks returning next week, there is still fuel for an additional advance into year-end. Don’t try to hold for the peak, as you could miss it. Do some selling along the way as the market rally continues.

Expected Returns

In Picking Stocks in a Bond-Friendly Environment, we expanded on Goodbye TINA- Hello BAAA. The gist of both articles is that bonds will likely outperform stocks over the coming ten years. Our article Picking Stocks in a Bond Friendly Environment reviewed prior 10-year periods where stocks underperformed bonds to help assess which stock factors and industries should outperform. The graph below from Topdown Charts provides a few more options. As shown, they expect stocks to return about 3% annually over the next five to ten years. That pales compared to foreign stock options, which are over 10%. The chart further adds credence to our opinion that investors relying on passive strategies may underperform investors employing more active strategies.

expected returns

China Stocks Get Crushed

The table below shows that Chinese stocks fell sharply on Monday. The widely followed Hang Seng Index fell over 6%, while the Tech Index fell nearly 10%. China’s GDP beat expectations growing at 3.9% versus estimates of 3.3%. Despite the good economic news, investors are concerned that the recent shuffle in the government will lead to increased global tensions, which are not friendly for growth. The Chinese yuan is also depreciating on the news. It now sits at its lowest level versus the dollar since 2008.

china stock markets

Housing Affordability

The graph below charts the stunning rise in mortgage rates and their effects on housing affordability. On January 1, 2022, only ten months ago, the 30-year mortgage rate was 3.22%. A potential buyer looking for monthly mortgage payments of $3,000 could afford to buy a house worth $692,000. Today mortgage rates are north of 7%. The same home buyer today can only afford a house worth $444,000. Either mortgage rates fall quickly, or house prices will have to adjust significantly. As Lance Roberts often says, home buyers buy payments.

housing affordability

Tweet of the Day

better returns ahead bearish

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

> Back to All Posts