Bank of America predicts that the 'semi-annual interest rate hike' will start in December, and the 'cheap yen era' of arbitrage trading is likely to come to an end.
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According to Golden Finance, citing Bank of America economists' predictions, the Bank of Japan may raise the interest rate from 0.5% to 0.75% at its meeting on December 18-19, thus starting a cycle of 'hiking every six months'. If this prediction comes true, it will not only be a historic shift in Japan's monetary policy but may also be a key turning point in the global market liquidity environment.
I. Why does Japan's interest rate hike 'affect the world'?
Japan has maintained the lowest interest rates in the world for a long time, making it the most important 'low-cost funding pool' in the international financial market. Countless investors borrow cheap yen, converting it into dollars, euros, or other high-yield assets for investment, which constitutes a massive 'yen arbitrage trading'. This mechanism has injected vast liquidity into global stock markets, bond markets, and even the cryptocurrency market.
Once the Bank of Japan initiates a clear and sustained interest rate hike cycle, it means:
1. Rising Borrowing Costs: The core cost of arbitrage trading—the yen interest—will systematically increase.
2. Increased Exchange Rate Volatility: Interest rate hikes typically support yen appreciation, exposing traders to foreign exchange loss risks.
3. Expectation Changes: The long-standing belief in the 'cheap and stable yen' has been shaken.
II. Potential Impact on Global Market Liquidity
1. Reversal of Capital Flows: Some arbitrage funds may choose to close positions and repay yen loans, leading to capital flowing back to Japan from high-risk assets (including emerging market stocks, US bonds, and cryptocurrencies). The 'faucet' of the global market may be tightened.
2. Volatility Soars: Not only the yen exchange rate, but the volatility of global assets may also intensify due to the massive reallocation of funds. During periods of tightening liquidity, the market may overreact to any negative news.
3. Risk Assets Under Pressure: Over the past decade, abundant global liquidity has been a key factor supporting the valuations of various risk assets. Japan's shift as the last major 'easy money fortress' may weaken this foundational logic and prompt global investors to reassess risk.
III. Special Implications for the Cryptocurrency Market
The cryptocurrency market, as a frontier for high volatility and high risk appetite, is highly correlated with the liquidity environment:
· Positive Outlook: If some yen arbitrage trading is unwound, capital inflows may first impact traditional assets, while the crypto market, as an alternative asset, may experience complex volatility due to safe-haven or asset reallocation.
· Negative Outlook: In the overall macro context of tightening global liquidity, investors' risk appetite may be suppressed. The crypto market, as a 'liquidity barometer', may face greater selling pressure in extreme cases, especially in areas deeply tied to leverage and arbitrage trading.
· Structural Changes: Japan's domestic crypto market may be affected by changes in interest and exchange rates. At the same time, the composition of funds in the global crypto market may undergo subtle changes.
Conclusion: Preparing for the 'liquidity transformation'
Bank of America's forecast outlines an aggressive interest rate hike path, which is not yet an official conclusion. However, it undoubtedly sounds the alarm for us: the curtain of the last major negative interest rate era in the world may be falling.
For investors, this does not mean immediate panic but rather the need to:
· Paying close attention to the decision and forward guidance from the Bank of Japan's December meeting.
· Reassessing the dependence of investment portfolios on global liquidity.
· Staying Calm Amidst Volatility: The early stages of liquidity shifts are often accompanied by high volatility and uncertainty.
Every step taken by the Bank of Japan will not only be a domestic affair but a crucial decision related to global funding costs and flows. Market, please fasten your seatbelt.
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