(20 DECEMBER 2017)DAILY MARKET BRIEF 1:Bank of Japan’s government debt rose to record-high.

The total holdings of the Bank of Japan’s is now standing at all-time high. The Japanese quantitative easing has sent the level of debt very high because of the massive quantitative easing over the past decade. It has been a while that the sustainability of such a debt level is being questioned.

What is clear is this debt level will make it very tough for the BoJ to normalize the monetary policy within at least the next few years. Lowering the stimulus would likely trigger massive turmoil in the economy.

For the time being, wages are not increasing and inflation is still not there yet to help killing the debt. It is been really while since the BoJ is all-in and we do not see this stopping in the medium-term.

Currency-wise, markets are bullish on the USDJPY pair on strong expectations on the Fed’s rate path next year. We believe that there is a strong likelihood that markets will be disappointed by the Fed (while markets clearly know that BoJ cannot really do anything for the time being). Ironically, we then stand ready for renewed Yen bulls at the start of 2018 which will definitely not help the BoJ. Times are difficult for the BoJ.

By Yann Quelenn