Global: Morning Outlook: Policy Challenges Loom Over China and Japan

As trading activity resumes in Asian markets on Tuesday, attention is squarely focused on China and Japan following the Lunar New Year break and the Presidents Day holiday in the United States.

Investors are keenly observing whether the gradual uptrend in Chinese markets will persist, while also monitoring Japan’s stocks and currency for potential movements unseen in over three decades.

The economic calendar for Tuesday remains relatively light. The Reserve Bank of Australia is set to release minutes from its recent policy meeting, and China’s central bank will announce its latest interest rate decision.

Anticipation surrounds the People’s Bank of China, expected to maintain its one-year loan prime rate at 3.45% and potentially adjust its five-year rate downward from 4.20% to 3.95%, influencing mortgage rates.

Chinese stocks kicked off the week with modest gains, with the Shanghai Composite rising by 1.6% and the CSI 300 by 1.2%. However, considering the 2% increase in Asian shares during the Lunar New Year, the performance may appear less remarkable.

Nonetheless, if the CSI 300 extends its gains on Tuesday, it would mark the sixth consecutive rise, a streak not seen since January 2023, fostering a cautious sense of optimism that contrasts with recent pessimism.

In contrast to many Asian countries facing tightened financial conditions, Japan stands out with its loose conditions. With stocks hitting a 34-year high, the yen weakening to levels not seen in decades, and domestic bond yields remaining below 1%, Japan’s financial landscape appears remarkably relaxed.

Goldman Sachs’ Japanese financial conditions index recently hit a 34-year low, reflecting the yen’s decline and the buoyancy of the stock market, potentially fueling inflationary pressures.

While this scenario might prompt the Bank of Japan to contemplate ending negative interest rates and shifting them into positive territory after eight years, challenges persist. Despite the robust stock market, Japan unexpectedly slipped into recession, and domestic demand remains tepid, casting uncertainty on future wage growth.

The BOJ faces a delicate balancing act: whether to adjust interest rates amid conflicting economic signals or intervene to support the yen in cooperation with the Ministry of Finance.

All eyes will be on Japan’s 20-year bond auction on Tuesday, following strong demand from pension funds in recent 10-year sales. Additionally, Monday’s auction of 12-month bills marked the first positive yield at auction since October 2014, adding to the market’s intrigue.