Axios Macro

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December 20, 2022

Welcome to the penultimate Macro newsletter of 2022, with news from Japan sending ripples through global financial markets. Plus, the latest on U.S. housing. 🏠

  • Last chance! If you'd like to enter your economic predictions for 2023, click here. We'll lock the survey at 2pm ET today and bring you the results in tomorrow's newsletter.

Today's newsletter, edited by Javier E. David and copy edited by Elizabeth Black, is 698 words, a 2.5-minute read.

1 big thing: What the Bank of Japan's surprise means for the world

Illustration of the Yen symbol combined with an upward pointing arrow

Illustration: Annelise Capossela/Axios

This has been a year in which all the world's major central banks engineered a massive pivot toward higher interest rates and tighter money. Almost all, that is.

  • Until last night (Tuesday morning Tokyo time), the Bank of Japan was the exception to the rule.

Driving the news: In a surprise move, the central bank loosened its "yield curve control" that capped long-term interest rates on 10-year Japanese government bonds at 0.25%. That cap is now 0.5%.

  • Japanese rates will remain low, but the action signaled that, after two decades of trying mightily to coax inflation higher, even Japan sees a changing balance of risks.
  • The move sent the yen soaring by about 4% against the U.S. dollar in early trading, a massive jump for one of the world's most important currency pairs. It also made for bumpy trading in global bonds and stocks.

Why it matters: The hawkish pivot is a fitting end to a year featuring a momentous shift in the underpinnings of global monetary policy. It is a sign that the war on inflation is truly a worldwide affair.

  • It helps the U.S.: When major central banks all tighten policy simultaneously, it helps reduce global inflationary pressure.
  • Tighter money from the BoJ means the Federal Reserve and European Central Bank, all else equal, don't need to raise rates quite as much to lower inflation.

State of play: Japan entered a cycle of slow growth and falling prices a quarter-century ago. It has been at the forefront of using unconventional policy, including negative interest rates and quantitative easing, to boost inflation.

  • Those efforts accelerated in 2013 under prime minister Shinzo Abe and BoJ governor Haruhiko Kuroda, as they set out to jolt Japan from its malaise.
  • Even over the last 18 months, Japanese inflation has remained subdued, reflecting the deep undertow of deflation.
  • That's why the BoJ has kept its target interest rates negative and capped longer-term bond yields, even as the rest of the world tightens.

Kuroda's term is up this spring after a decade in the job; it appears he is setting up a transition to offer his successor greater policy flexibility.

What they're saying: "In addition to the upward revision of the outlook for the domestic economy in the statement, Governor Kuroda also indicated … rising momentum of higher wages and inflation," Ayako Fujita, a senior economist with JPMorgan Chase, wrote in a research note.

  • "We think this is a signal that the BoJ is becoming slightly more confident about achieving the target inflation in a stable manner," Fujita added, calling the move "the first step toward policy normalization."

The bottom line: As 2022 ends, the world's major central banks are all working together to lower inflation.

2. 🏠 Good news in the latest housing data

Data: U.S. Census Bureau; Chart: Axios Visuals
Data: U.S. Census Bureau; Chart: Axios Visuals

Data out this morning tells a familiar story about the current state of the housing market. Demand for new homes has plummeted, so homebuilders are breaking ground on fewer of them.

  • But there is still decent news on housing supply: Builders continue to complete homes in their massive backlog at a rapid rate — an inventory boost that could also help bring down prices.

What they're saying: "A huge wave of residential units under construction built up during the supply chain turmoil of the last few years, and it is going to wash over the housing market in 2023," Bill Adams, Comerica Bank's chief economist, wrote in a note.

  • "The turn in the housing market is bad news for GDP, but good news for inflation."

By the numbers: Last month, homes completed rose to an annualized 1.5 million, a 15-year high. In fact, homebuilders finished homes faster than they broke ground on new ones.

  • A huge drop-off in single-family units pushed overall housing starts down.
  • Construction of single-family homes dropped to an annualized 828,000 rate, the lowest since the early days of the pandemic and down more than 30% from last year.

Where it stands: Mortgage rates have fallen from the highest levels of the year, but they remain twice as high as they were last year.

  • Builders have struggled with sky-high costs for materials and labor, and shortages of both have slowed their ability to finish homes. But there are some signs those troubles are receding.