00:00We do have that optimism around a potential deal. Talk us through the reaction.
00:04So particularly in terms of JGBs and how that could be tied into the Iran story.
00:11Morning, Tom. I think there has been a bit of respite for JGBs, as you can see,
00:14that the yields have come off a bit. But I think the question is, you know,
00:18if you are even assuming the best case scenario that a deal goes through
00:22and we've got the state of almost reopening, I think that just the backlog is going to take months to
00:28clear.
00:29So it's not clear that, you know, inflation is going to come down in Japan anytime soon.
00:34And by the BOG's own estimates, inflation is going to be averaging 2.5 to 2.8 percent this fiscal
00:39year.
00:40So if you assume that the economy is going to be on an even key, which has been of late,
00:45I think that the Bank of Japan needs to raise rates fundamentally to solve this problem.
00:51At the moment, they are less than 1 percent, of course, and the neutral is somewhere around 1.
00:56It was 1.5 percent even before the war started.
01:00And after the war started, I ran the Taylor Rule function.
01:03And that shows that the Taylor Rule rate, prescribed Taylor Rule rate, is somewhere around 2.8 to 3 percent.
01:09So there's a humongous gap between where the Bank of Japan needs to be and where it actually is.
01:15So I think that the markets are kind of the sell-off in all markets that we have seen so
01:20far is a reflection of that.
01:21If you look at the JGBs and you fully swap out the cash flows into U.S. dollars to compare
01:27them with Treasuries,
01:29what you see is that they are trading at a discount of 25 to 40 basis points.
01:33That's pretty steep.
01:34And the markets are saying, you know what, you've got a problem here.
01:37You're fundamentally behind the curve.
01:39You need to get even with inflation.
01:43And the JGB is not doing that.
01:45So whatever we are seeing today as a respite is not a fundamental turnaround for JGBs.
01:52Ven, and it's important to reiterate that there is still no deal that's been signed.
01:56And I just wonder whether hopes of a breakthrough, as opposed to an actual breakthrough, are enough to keep the
02:02rally going.
02:05Yeah, absolutely.
02:06It's scary, Jumana.
02:07I mean, we have seen this plot turn and twist every second minute, literally, with a tweet.
02:13So I think that the markets are over-optimistic here.
02:16There is a chance that we may not get a deal, and then that will set ourselves up for a
02:21sell-off.
02:21But even assuming that the deal is going to come through, I think stocks are overpriced.
02:27And I think there is a fair bit of growth building up in the markets.
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