Japanese inflation data is under close observation. However, it would need to be very high to prompt a change in the Bank of Japan’s current approach. The Bank is likely to keep its position until January or March 2026. On the other hand, the People’s Bank of China plans to maintain its Loan Prime Rates (LPR) for now. Last month, it lowered LPRs for the first time since October. The 1-year rate went from 3.1% to 3.0%, and the 5-year rate decreased from 3.6% to 3.5%.

Monetary Policy Changes

The PBOC also cut its 7-day reverse repo benchmark rate by 10 basis points to 1.4%. LPRs have become less significant since the PBOC switched its main monetary policy tool to the seven-day reverse repo rate in mid-2024. This change aligns China’s policy with global standards like those of the U.S. Federal Reserve and the European Central Bank, which typically use a single short-term policy rate to shape market expectations and liquidity. Essentially, the situation revolves around patience and perspective. Japan’s monetary authorities are unlikely to respond unless inflation rises well beyond expectations. Even then, changes to policy are not expected soon, as the Bank is committed to projections that extend well into the next year. This indicates that we shouldn’t expect sudden changes in Japanese rates or bond yields without a strong trigger. The current policy path seems to have been chosen after thorough consideration. For investments linked to Japanese Government Bonds (JGBs) or local data, a quiet period seems quite probable.

Central Banks and Market Expectations

Now, turning to China, the situation is about adjusting rather than remaining static. The recent reduction in Loan Prime Rates signals a shift, but it doesn’t indicate broad monetary easing. The central bank is focusing more on the seven-day reverse repo rate, which is now at 1.4%. This rate is becoming the main tool for monetary control, replacing the previously dominant LPR system. It’s not unusual as central banks in the U.S. and eurozone already use short-term benchmarks to guide market participants. An effort is underway to simplify the structure and improve communication with markets. This is important when considering short-term volatility in yuan-denominated forwards and swaps. Having a single rate as the key policy tool enhances transparency, which typically leads to fewer policy surprises, even if movements may continue. From a timing perspective, remember that policy support is being fine-tuned rather than aggressively increased. These are not drastic changes and won’t likely lead to sudden shifts like rapid rate hikes or fiscal interventions. However, small actions—like the minor LPR cuts—can accumulate over time. There may be opportunities to analyze carry positions, especially those involving currencies with high real yields. We are also observing how institutions adapt to changes in short-term metrics. Forward markets will now take cues from the reverse repo rate instead of solely relying on longer-term loan benchmarks. Therefore, the way we gauge sentiment has changed. If you rely solely on 1- or 5-year LPRs for your models, now is a good time to consider updating your parameters. Lastly, while policy rates may appear stable, liquidity conditions can change weekly. This daily fluctuation is crucial for traders functioning in tight timeframes, especially when central banks aim to shape expectations while executing slowly. In summary, there is a strong reason to focus on short-term metrics—not because something dramatic is happening, but because nothing drastic is taking place. Create your live VT Markets account and start trading now.

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