Japan’s Uncontrollable Yield Curve

Plus: Go suck an egg… if you can afford one. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

January 17, 2023

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TOGETHER WITH

Good morning.

Ladies and gentlemen… they got him.

After a 30-year manhunt, Italian police arrested the nation’s most notorious mafia boss, Matteo Messina Denaro, at a Sicilian hospital Monday morning. The 60-year-old Denaro has been on the run since being sentenced to life in prison in 1992 for ordering the deaths of Italian prosecutors. So while inflation might be still out of control in Italy, authorities can at least celebrate a victory in their even longer-running war against La Cosa Nostra.

Morning Brief

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Japan could again shake up its fiscal policy.

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Food is the new gas.

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Fight the Black Mirror with a colorful sweater.

Fiscal Policy

Bank of Japan Braces for Major Bond Policy Shakeup

The most consequential development in global monetary policy this week may be coming some 6,000 miles to the east of The World Economic Forum’s annual financial celebrity gabfest in Davos.

This week, the Bank of Japan is holding a two-day monetary policy meeting that economists expect may result in a fatal blow to its occasionally baffling yield curve control practices. The repercussions for the nation’s nearly $8 trillion government bond market are staggering. In other words, BoJ governor Haruhiko Kuroda just emerged as Davos’ most sought-after cocktail party guest… when he finally gets there.

Trouble with the Curve

When is a sample size large enough? It’s been less than one month since BoJ instituted a new yield curve control (YCC) policy that widened the central bank’s tolerance range on the 10-year bond yield to fluctuate plus-or-minus 0.5%, up from 0.25% — effectively the same as interest rate hikes. That move came after more than a year of Kuroda resisting any fine-tuning to Japan’s ultra-loose fiscal policy, arguing that hiking rates before robust wage growth (i.e., what the rest of the world was doing in the face of raging inflation) would make it impossible to hit the nation’s 2% inflation target.

But protecting the bond yield’s newly widened limits has proven costly. Bond yields rise when prices fall, and 10-year Japanese government bond yields have already exceeded the 0.5% ceiling more than once since December’s policy decision. In turn, BoJ has been forced to spend a fortune on bond-buying intervention in the past month to protect the new limit — including coughing up nearly ten trillion yen, or over $70 billion, on bonds just last Thursday and Friday alone. Even that heavy-handed intervention failed to prevent the yield from curving over the 0.5% limit. Now, the central bank reluctantly finds itself in control of over half of the entire bond market – more than even Japan’s bureaucratic bankers find comfortable:

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The bank, likely to keep its interest rates at 0.1%, is now weighing its YCC options and is reportedly considering both increasing its tolerance range to plus-or-minus 0.75% and scrapping the policy altogether.

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Domestic investors are viewing the latter scenario as another in-effect rate hike, according to Bank of America Global Research economists. In turn, the economists expect that ending the policy outright could sharply affect Japanese stocks to the tune of a 3% decline in the Tokyo Stock Price Index, or TOPIX.

If, Not Yen: The fiscal policy finetuning has had at least one solidly positive effect so far for Japan: the yen is up nearly 14% against the US dollar in the past three months after it fell to its lowest point since 1998 in September. Kuroda, who’s exiting his post this Spring, can at least claim that victory before retirement. He can also finally claim a spot in the limelight at Davos on Friday, where he will appear after the BoJ meeting concludes. Rarely has a BoJ chief made it to the top of the A-List at star-studded Davos, so we hope he doesn’t miss all the fun.

– Brian Boyle

Commodities

Oxfam Calls For Windfall Tax on Big Food Companies

(Photo Credit: 16:9clue/Flickr)

Move over energy giants. Big Food faces a similar backlash as an industry that’s turning a tidy profit amid a plethora of globe-spanning cost-of-living crises.

Anti-poverty charity Oxfam released a report on Monday calling for governments to impose windfall taxes on large food companies. “Very large food and energy companies are making excessive profits,” Oxfam International’s executive director Gabriela Bucher told the AP. The greed-shaming was timed to coincide with The World Economic Forum kicking off in Davos — so the world’s wealthiest may feel a little more guilty, or at least press-shy, as they snack on vol au vents.

Bad Eggs

The rising cost of groceries has been creeping into the public consciousness, and it came to a head at the end of last week when America’s largest egg producer Cal-Maine reported a record quarterly profit of $198 million. Eggs have been under particular inflationary pressure around the world due to bouts of avian flu, climbing a whopping 59.9% year-on-year to December, marking the biggest US price increases of any supermarket product per Bureau of Labor Statistics data. It’s worth noting, however, as an incensed Sen. Bernie Sanders pointed out on Sunday, that Cal-Maine has had no cases of avian flu.

Egg suppliers are far from the only food companies to see their profits rise after passing their rising costs on to consumers:

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Although overall inflation showed signs of cooling off last month, grocery prices stayed hot. Kitchen staples including butter, flour, and milk saw their prices rise by 27%. 24.9%, and 14.7%.

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Major brands have been consciously passing the inflation baton onto consumers for a few months now in the knowledge that consumers are willing to shell out. PepsiCo reported a 16% increase in revenue YoY for Q3 last year after putting up prices, and CEO Ramon Laguarta told investors: “The truth is that our brands… are being stretched to higher price points and consumers are following us.”

Boil ‘em, Mash ‘em, Stick ‘em on Your Portfolio: One particularly starchy and commonplace foodstuff turned out to be a piece de resistance for US investment firm Tiger Global last year, according to a Financial Times report. Tiger invested in potato producer Lamb Weston, shares of which have climbed a healthy 37% since Tiger declared its investment. Sadly Tiger’s other less fruitful investments outweigh its stake in Lamb Weston, rendering it small potatoes.

– Isobel Asher Hamilton

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Fashion

Italian Startup Clothing Line will Protect Your Identity from Facial Recognition Software

Big Brother is watching you…unless you wear this wacky shirt.

Cap_able, an Italian clothing startup, is trying to make fashion for the digital age, meaning all the items in its new Manifesto Collection feature intricate patterns that fool facial recognition software into believing the wearer is a giraffe or a zebra or totally invisible.

Error, Error

In a world where seemingly every device is constantly recording us – phones, computers, and yes, even Roombas – privacy has become almost a fantasy. Cap_able’s clothing uses what it calls “adversarial patterns” developed by artificial intelligence algorithms to confuse facial recognition devices. CEO Rachel Didero told CNN that her collection, which includes shirts, hoodies, pants, and dresses, successfully protected wearers’ identities 60% to 90% of the time.

They’re not very subtle. The designs are loud and vibrant, looking like a cross between animals and TV static. And the clothing may not keep up with advances in facial recognition, which makes them really expensive considering the cheapest item is a $310 short sleeve sweater.

Facial recognition capabilities are a mixed bag at this point. Sometimes it works well, but in other cases, it has led to dire consequences:

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Thorn is a digital defense group that has helped authorities rescue more than 9,000 victims of human trafficking and capture more than 10,000 culprits. Advocates say facial recognition is one of the best tools for suppressing child exploitation.

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In 2019, Nijeer Parks was accused of shoplifting candy and trying to hit a police officer with a car in New Jersey despite being 30 miles away at the time of the incidents. He wound up spending 10 days in jail and paying $5,000 to defend himself before the case was thrown out for lack of evidence. Studies have found that facial tech is not the best at correctly identifying Black, Asian, and female faces.

A Scanner Darkly: Legislation surrounding facial tech is still hotly debated. New York doesn’t allow it in schools, and Maryland employers can’t use it in job interviews without consent. But even communities that originally prohibited facial recognition for government use have since made a U-turn. After a rise in homicides starting in 2020, New Orleans police can now use the tech to aid in violent investigations. There are currently no federal bans, but with all the concern around privacy, it wouldn’t be surprising to see Philip K. Dick’s scramble suits become a reality.

– Griffin Kelly

Extra Upside

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The Mooch has high hopes for a quick Bitcoin and crypto rebound.

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Bon Voyage: Paris could ban rideshare scooters.

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