By DNCA

There are few free museums in Japan, but the Mint Museum, opposite the Bank of Japan fortress, is an exception to the rule. Here, visitors discover the original mission of the supreme monetary institution, founded in 1882: to restore confidence in the currency.

At the time, commercial bank and government bonds were being issued in astronomical quantities to finance the civil war pitting Emperor Meiji against the traditionalist conservatives of the Tokugawa Shogunate. Inflation soared. Bank bills and bills no longer had any value in the eyes of the creditor population, who had resorted to bartering to trade: they lost their role as money. The joint launch of an austerity policy and the creation of the central bank will soon bring the country back to financial stability, while joining the club of great powers.

142 years later, the yen is the world’s third-largest currency. But the Japanese population is anguished by the spectacular collapse of its currency and the roar of the Godzilla of inflation, which it had not heard roar for so long. The BoJ is embarking on a program of rate hikes and quantitative tightening that would have been unthinkable just a few quarters ago. The markets are awaiting the next monetary policy decision on September 20, scalded by this summer’s deflagration. The BOJ may well put its ambitions on hold. Care must be taken not to upset fragile domestic demand. The yen has managed to rise above limbo. And the shock of his decision on international markets has not left Kazuo Ueda indifferent.

Like the markets, it will be scrutinizing the FED’s decision two days beforehand.

Employment figures(Non Farm Payrolls) were not sufficient to settle the question of the magnitude of the expected decline.

Inflation figures show that housing (one of the main components of the price index) and certain services (school food, transport services, etc.) are continuing to rise.

Inflation swaps have risen since publication.

Consumer sentiment measured by the University of Michigan was above expectations on Friday.

Despite this, rate cut expectations have returned to the levels seen prior to the release of the employment figures. The market is once again incorporating a 40% probability of a 50bp cut on September 18, and a 155bp cut by the January 19 date. We have come full circle.

At their lowest point on the curve (proxy for the terminal rate anticipated by the markets), SOFR (Secured Overnight Financing Rate) futures are trading at 2.78% (March 2026). 240 basis points below the FED FUNDS, they are already positioned on the neutral rate targeted by the FED for the long term (according to the Dot Plots). It’s always difficult to argue against the market’s view, however aggressive or hasty it may seem. Nevertheless, an obvious question arises: can the FED be more generous than the markets expect if the central scenario remains that of an economic soft landing? The answer depends on the expected gain from taking duration risk…

This week’s fall in real rates (expectations of FED rate cuts, rebound in break-even inflation rates) benefits gold, which is approaching $2600. The latest US budget figures are slipping. It seems clear that none of the candidates intends to make deficit reduction a priority. These concerns are supporting the precious metal.

As expected, the ECB has been firing on all cylinders in this turbulent month of September. Without firing a shot in the arm. Despite the downward revision of its growth expectations (data from Germany continues to deteriorate), it settled for a second cut of 25 basis points. As the Governor of the Banque de France reminds us, unlike the FED, it has no “growth mandate”. That’s the job of governments. A cautious Christine Lagarde warns that inflation will rebound in the second half of the year (wages, services). As a result, markets are less enthusiastic about revising their copy for the next meeting in October, even if the ECB concedes that the momentum of wage pressures is receding.

Meanwhile, in China, 10-year yields continue to sink to record lows.

At the cost of a painful deleveraging phase, the country continues its economic transition. This involves a forced reduction in the weight of real estate in GDP and in savings, which must be boosted on domestic financial markets, facilitating the financing of industries favoured by the party (renewables, new technologies, higher value-added industries, etc.). It is also a way of reducing the importance of shadow-banking and improving the country’s financial stability…

In order to manage the fracas of this transition, China’s central bank is steering in an accommodating, but not overzealous, direction. For the time being, falling property prices and equity markets have steered savings towards deposits, but financial repression (-100 basis points on 5-year prime lending rates since 2019) is driving flows towards bond markets, particularly sovereigns, whose yields are being squeezed.

As Oscar Jorda (FED San Francisco) noted in a fascinating 2016 study(History and facts of the new business cycle”), since the end of the Bretton Woods system in 1971, the meteoric rise in global indebtedness (expressed as debt-to-income) has been driven by the spectacular increase in household real estate lending, more so than corporate lending. His study reminds us that, since then, it has become difficult to envisage a business cycle without studying the credit cycle. For a recession to be accompanied by a financial crisis, some form of credit event leading to a violent deflation with systemic ramifications (real estate crisis, serial collapse of leveraged funds like LTCM) is necessary. The unwinding of the yen carry trade did not trigger such an event. In 2023, the FED reacted immediately to the collapse of the SVB bank. China managed to deflate its real estate bubble at a high social cost, but without its economy collapsing. For the time being, the global macroeconomic scenario seems to be that of a monotonous slowdown, with no major accidents. For savers, this will be a less painful way of getting through the change of cycle than 2020 or 2008…