Asia is bipolar when it comes to interest rates, a factor driving equity markets, sometimes in strange ways.
Chinese stocks sank here on Wednesday while the market waits for stimulus that has yet to come. In Tokyo, traders are factoring in the weakest yen exchange rate in 20 years. A cheap currency and therefore cheap goods are normally a good thing for exporters, but there is a debate on that front this time around.
So the region's largest two economies are persisting in highly accommodative monetary policy. Elsewhere in Asia, though, inflation is rearing its ugly head, and rates are rising.
Chinese stocks were down on Wednesday, with the CSI 300 index of the largest stocks falling 1.6%. That put them totally and unusually out of sync with U.S. markets, reflecting none of the S&P 500's 1.6% rise the day before, let alone Nasdaq's 2.2% gain.
The driver was the Chinese central bank. The People's Bank of China surprised investors on Wednesday by leaving the one-year loan prime rate unchanged at 7.3%, when analysts had been expecting stimulus in the form of a rate cut.
The weakness transferred across the border into Hong Kong, where the Hang Seng Index declined 0.4%, leaving it looking at a 2.6% two-day loss following the long Easter weekend. Hong Kong's interest rates are inextricably linked with U.S. rates, because the Hong Kong dollar is pegged to its U.S. counterpart, although Hong Kong banks do sometimes resist shifting the burden of a U.S. hike immediately to their customers.
You'd expect Hong Kong stocks to follow Wall Street, and they normally do. The disappointment over today's central bank decision exported across the border instead.
No yen for the yen
Japan's equity market is also driven by the central bank. The Bank of Japan's persistently negative interest rates are causing such a differential with U.S. rates that the Japanese yen has broken through its weakest levels against the U.S. dollar in two decades.
The Topix index in Tokyo rose 1.0% today and has generally been climbing as the currency weakens. The Tokyo Stock Exchange is up 8.8% since March 8.
The yen stands today at ¥128 to the U.S. dollar, blowing out 11.4% just since March 7, a little over six weeks. At this rate, the rate will soon cross ¥130, and is already at levels last seen in April 2002.
In currency terms, it has shot through the roof since the start of 2021, when the yen was close to ¥100 to the dollar (¥102 that January, to be exact). It has lost one-quarter of its value, 24.7%, in the last 16 months.
Are we seeing "bad" yen weakness? The debate is raging, and BOJ Governor Haruhiko Kuroda on Monday warned that the currency's "quite sharp" movements could hurt companies in their business plans.
The flipside of currency weakness is that while my Epson (SEKEY and T:6724) printer or Canon ( (CAJ) and T:7751) camera may be cheaper abroad, any parts sourced from abroad and used by a Japanese factory will be more expensive. It's also far from ideal for manufacturers to have to contend with wild currency swings that can affect the effective cost of a product even while it's on the container ship to stores.
The recent sharp fall in the yen "could make it hard for companies to set business plans," Kuroda told the Japanese parliament. "In that sense, we need to take into account the negative effect" of the currency, he said. But he repeated his stance that massive central bank stimulus was necessary to support a fragile economic rebound. Aside from sudden moves, a generally weak yen is good for Japanese business, he concludes.
Japanese Finance Minister Shunichi Suzuki says what's happening now is a "bad yen decline," because companies are unable to raise prices and wages fast enough to keep pace.
The currency concerns will need to be on the radar for other economies in the region, where inflation is the main fear. But when those Asian nations are home to major exporters with goods that sell against Japanese and Chinese competitors, low rates in China and Japan put their homegrown companies at a disadvantage.
Surprise hikes elsewhere
South Korea shocked the market on April 14, raising interest rates at its first-ever rate review without a sitting central bank governor. The Bank of Korea lifted rates a quarter point, to 1.5%, a move that economists had not seen coming.
The acting chair of the bank's policy board sounded a note of urgency, saying the central bank couldn't wait to raise rates until the formal approval of the successor to Lee Ju-yeol, whose term ended on March 31. His successor, Rhee Chang-yong, the former director of the International Monetary Fund's Asia and Pacific Department, saw his nomination approved on Tuesday by a parliamentary committee after hours of grilling by the legislature.
It's all change at the top in South Korea, which was the first nation in the Asia Pacific region to start raising rates, with a move last August. President-elect Yoon Suk-yeol, a conservative who narrowly won a brutally contested race, is set to take office in May. Yoon likely favors a more-dovish central bank than his defeated opponent, who wanted to use rising rates to curb home prices. Yoon, on the other hand, wants to use easier credit conditions to spur growth and advocates a hands-off, deregulatory approach to the economy. Yoon has also pledged to distance South Korea from China and bring it closer to its key democratic allies, the United States and Japan.
Inflation is relatively tame in Korea by global standards, but accelerating. The central bank says it's soon to rise higher than 4%, well above its February forecast of 3.1%, and remain there for quite some time.
New Zealand's central bank also surprised the market on April 13 by raising rates by half a percentage point, its largest hike in 22 years, mainly to ward off inflation that it expects to peak at 7% in the first half of this year. In bringing forward its intended tightening, the Reserve Bank of New Zealand states that a "larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment."
After seven years of cutting rates, New Zealand became an early adopter of tightening when it started raising rates in October 2021. Last Wednesday, The Kiwi central bank increased its overnight rate from 1.0% to 1.5%, noting that the local economy remains strong. "Employment is above its maximum sustainable level, and labour shortages are impacting many businesses," the reserve bank committee notes.
Singapore is also tightening monetary policy, with inflation picking up pace in Southeast Asia. The central Monetary Authority of Singapore (MAS) normally governs rates by balancing the heavily managed Singapore dollar against a basket of currencies from its trading partners due to the importance of trade in the city-state. The MAS made an unusual double move on April 14, last Thursday, by re-centering the midpoint of its exchange-rate policy band, the Nominal Effective Exchange Rate, and increasing the rate of currency appreciation.
That was its third monetary tightening in the last six months, and the first time in 12 years that it had taken a double-barreled approach. It has hiked its inflation forecast by two full percentage points, to between 4.5% and 5.5% for this year from a range of 2.5% to 3.5%.
Expect more of this dichotomy the rest of this year, with China and Japan more concerned about slowing growth, while rising interest rates bother the rest of the region's central bankers. It leads to rapid and unpredictable changes in currencies, with equities often moving in tandem as a result.