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Wall Street just received a big lump of Christmas coal.
A surprise announcement from the Bank of Japan sent investors spinning and global markets reeling on Tuesday. The country’s central bank signaled that it would reverse two decades of policy precedent and begin to move away from loose monetary policy intended to keep wages and prices high.
The move, which opens the door to future rate hikes, stoked investors’ fears that the global war on inflation is still roaring on and that recession is unavoidable.
What’s happening: The theme of 2022 has been higher interest rates. Over 90% of central banks have hiked rates this year, making the (mostly) globally coordinated effort to fight persistent inflation unprecedented, according to LPL Financial. There has, however, been one notable exception to the rule: Japan.
That all changed this week. The Japanese Central Bank loosened the yield on its 10-year government bonds from 0.25% to 0.5%. At the same time, the bank will increase its monthly bond purchases to $67 billion from around $55 billion.
The move sent the yen soaring to a four-month high against the US dollar, its largest one-day jump in 24 years and wreaked havoc on global stock and bond trading.
Why it matters: Japanese rates remain low, but Tuesday’s move means that the world’s third-largest economy now sees inflation as a risk.
That’s a big change: Japan had been keeping inflation low for decades in efforts to fight a prolonged strong yen and deflationary recession that stagnated the Japanese economy. Lately, the country has felt the impacts of an aging and falling population which has kept consumer demand and inflation low.
The BOJ policy minutes noted the shift. Core consumer price rises are now around 3.5%, still lower than in the United States and Europe but an increase from the previous statement. The central bank said that inflation expectations have risen.
Japan’s is the last major central bank to keep rates negative and this signals that it could be shifting its stance. That heightens investor expectations for more upsetting inflation news in 2023 and increased market volatility. They worry that Japan’s shift away from ultra-low rates will be the final nail in the coffin of the easy money era and will once again increase global bond yields.
“This BOJ move (like the removal of any other “peg”) along with the potential for more to come, supports volatility [in the year ahead],” wrote Bruno Braizinha and Mark Cabana, rates strategists at Bank of America.
In a news briefing, BOJ governor Haruhiko Kuroda said it was “too early to consider reviewing or exiting” its current easing policies, but that didn’t stop markets from reacting.
“Whatever the BOJ calls this, it is a step toward an exit,” said Masamichi Adachi, chief Japan economist at UBS Securities. “This opens a door for a possible rate hike in 2023 under a new governorship.”
Wells Fargo ordered to pay $3.7 billion for ‘illegal activity’
Federal regulators fined Wells Fargo a record $1.7 billion on Tuesday for multiple years of “widespread mismanagement” that they say harmed over 16 million consumer accounts, reports my colleague Matt Egan.
Wells Fargo’s “illegal activity” included repeatedly misapplying loan payments, wrongfully foreclosing on homes, illegally repossessing vehicles, incorrectly assessing fees and interest and charging surprise overdraft fees, according to the The Consumer Financial Protection Bureau.
“Wells Fargo’s rinse-repeat cycle of violating the law has harmed millions of American families,” Rohit Chopra, the CFPB’s director, said in a statement.
More to come: During a call with reporters, Chopra said the new settlement should not be read as a signal that “Wells Fargo has moved past its long-standing problems or that the CFPB’s work is done here.”
For instance, Chopra noted that the settlement does not provide immunity for individuals at Wells Fargo, and the agency recognizes the $3.7 billion in fines and restitution will not fix the bank’s problems.
In a statement, Wells Fargo emphasized that the broad-reaching settlement with the CFPB resolves multiple matters, most of which have been “outstanding for several years.” The bank said the required actions are “already substantially complete.”
“We and our regulators have identified a series of unacceptable practices that we have been working systematically to change and provide customer remediation where warranted,” Wells Fargo CEO Charlie Scharf said in the statement. “This far-reaching agreement is an important milestone in our work to transform the operating practices at Wells Fargo and to put these issues behind us.”
3M will stop making hazardous ‘forever chemicals’ starting in 2025
3M, the conglomerate behind Post-It notes and Scotch tape, has announced that they will stop making hazordous “forever” chemicals… in a few years.
The controversial chemicals, per- and polyfluoroalkyl substances (PFAS), are found in hundreds of household items and used to make coatings and products that can repel water, grease, heat and oil. The most recent science suggests that these chemicals are much more hazardous to human health than scientists had initially thought and probably more dangerous at levels thousands of times lower than previously believed, reports my colleague Jordan Valinksy.
In a statement Tuesday, 3M said its decision to end the chemicals’ production by 2025 is “based on careful consideration and a thorough evaluation of the evolving external landscape.”
The Environmental Protection Agency announced a proposal earlier this year to label “forever chemicals” as hazardous substances. California also announced a lawsuit recently to recoup the clean-up costs from PFAS.
“While PFAS can be safely made and used, we also see an opportunity to lead in a rapidly evolving external regulatory and business landscape to make the greatest impact for those we serve,” said 3M CEO Mike Roman in a statement. “This action is another example of how we are positioning 3M for continued sustainable growth by optimizing our portfolio, innovating for our customers, and delivering long-term value for our shareholders.”
The company expects to take a financial hit of about $1.3 billion to $2.3 billion over the next few years because of the PFAS discontinuation. Yet 3M (MMM) said PFAS represents a “small portion” of its revenue.
3M stock is down about 32% year-to-date.
