Investors are accustomed to the feeling that central bank policy has been driving markets.
With the Federal Reserve’s June deliberations now in the rear-view mirror, there remain set-piece meetings from the Bank of England and the Bank of Japan to navigate, even as the journey through the week remains complicated by Brexit risk.
JPMorgan does not subscribe to the theory that central banks are losing the ability to shape events. It looks to Tokyo for a road map of what could lie ahead elsewhere.
Recent bond and currency price trends in Japan show some success in what Marko Kolanovic, global head, derivative and quantitative strategies, describes as “central bank alchemy”.
“The government is issuing bonds and central bank is buying most of the issuance. While this is dilutive to private bond holders and increases credit and inflation risk, both bonds and yen are appreciating at the same time. This appears to create value out of nothing,” he said.