Japan’s first interest rate hike in 17 years

Japan hiked interest rates for the first time since 2007, ending the negative interest rate regime. While this was widely telegraphed, the Japanese yen fell on the news to levels versus the US dollar not seen since 1990. Generally speaking, a weaker currency means a country’s exports, in Japan, for example, cars, are cheaper abroad. However, it also means that a country’s imports, for example, in Japan, food and energy are more expensive domestically. This is a source of inflation that Japan has not been immune to over the past several years. In order to stop the currency from weakening further, the government has to step in and intervene, which it has done on numerous occasions in the last few years.

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• All things being equal, the exchange rate between two currencies has to do with the relative levels of interest rates
• As the US and Europe have been aggressively hiking interest rates, Japan has kept interest rates negative
• This has been a source of weakness of the yen and has added fuel to inflation being a concern for the first time in decades
• Inflation domestically is a source of political tension as consumers’ purchasing power is eroded
• Given Japan is just coming out of a multi-decade period of fighting deflation, the current environment is relatively new
• While there are many differences between Japan and the US, many pay attention to Japanese central bank policy as it has led the world in highly accommodative (zero interest rate) policies
• This could serve as a rough blueprint for what to expect in the US and other Western economies

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Gold breaks all-time highs again

Gold broke out again to close at all-time highs to finish the first quarter of the year, closing at $2,229.87 an ounce. The strength in gold is notable given it comes at a time when interest rates are still relatively high, and the US dollar has been relatively strong. As noted before, central banks outside of the US have been large buyers of gold of late. Gold has been historically viewed as an asset to protect against inflation, however it was stubbornly flat in 2021 and 2022 while inflation was high and rising while inflation was falling in 2023.

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• While gold is primarily viewed as an inflation hedge, it did not act accordingly during the recent rise in inflation
• It is notable, however that gold has risen as inflation has come down, and interest rates have remained high relative to recent levels
• We think this could be due to the US dollar's strength during the recent bout of inflation
• Gold breaking out to all-time highs right now could indicate a change in regime as it pertains to the US dollar as the world’s reserve currency and the lack of inflation we have become accustomed to
• Gold’s close cousin Silver has yet to follow but could if the current regime continues

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The latest meme asset?

The below chart was circulating in social media recently, showing the price shooting straight up, similar to a speculative crypto meme coin or AI semiconductor chip stock. However, the asset in question is actually cocoa, the main ingredient in chocolate. About 60% of global cocoa production is in West Africa, which has experienced poor harvests and caused shortages going into its third year. While this has a limited effect on the global economy, it is yet another example of how disruptions in what has become a globalized supply chain can lead to massive input price spikes.

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• As per the long-term chart below, cocoa prices have never had the kind of price spikes we are currently experiencing
• While the cocoa plant is indigenous to equatorial regions, the production of cocoa has been concentrated significantly over the last few decades due to sustainability efforts
• This has left the market more vulnerable as weather disruptions due to climate change can have a significant impact on the supply of the commodity
• While the impact of high cocoa prices is limited to those who have a taste for dark chocolate, it is an example of how supply chains can be easily disrupted in today’s global economy
• This is relevant for the production of all commodities, most notably those that are important for our modern energy infrastructure

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