Bank of Japan Governor Kazuo Ueda released the 'clearest signal yet' for interest rate hikes on December 1, suggesting that an interest rate hike could be considered at the policy meeting on December 19. This move has triggered a chain reaction in global markets, with the core impact pathways and specific manifestations as follows:
1. Core impact pathways
1.1 Yen carry trade reversal: Approximately $1 trillion of 'borrowing yen and investing overseas' transactions are facing closing pressure, and funds may flow back to Japan from high-yield assets like U.S. stocks.
1.2 Global interest rate center shifts upward: As an important source of global 'cheap funds', expectations for interest rate hikes in Japan have pushed Japanese government bond yields to multi-year highs, driving bond yields in the U.S., Europe, and other regions of Asia to rise in tandem.
1.3 Market risk aversion intensifies: Japan's policy shift as the world's third-largest economy is seen as a signal of tightening global liquidity, which may increase market volatility.
2. Impact on major global markets
2.1 The U.S. stock market: Facing direct impact. Historical experience (such as in March 2024) shows that the liquidation of arbitrage trades can lead to a significant one-day drop in U.S. stocks. High-valuation tech and growth stocks, being sensitive to interest rates, bear greater pressure.
2.2 The global bond market: A widespread sell-off has occurred. The expectation of a rate hike in Japan has not only pushed up the yield on domestic government bonds (with the two-year yield reaching a new high since 2008), but also caused bond yields in the U.S., Europe, and other regions to rise, leading to a decline in bond prices.
2.3 The foreign exchange market: The yen strengthens, while the dollar weakens relatively. After Ueda's speech, the yen appreciated about 0.4% against the dollar within the day. Market views suggest that this may become a turning point for the yen exchange rate.
2.4 Other markets: The reallocation of global capital flows may have spillover effects on markets in Europe, Australia, and other regions, exacerbating volatility.
3. Key variables and outlook for the future
The extent of subsequent impacts mainly depends on the following two core variables:
3.1 The pace of interest rate hikes by the Bank of Japan: The market generally expects that if the Bank of Japan adopts a gradual approach to interest rate hikes, it will provide the market with more time to digest, and the impact will be relatively mild.
3.2 The monetary policy of the Federal Reserve: Currently, the market expects that the Federal Reserve may lower interest rates in December. If the policies of the Japanese and American central banks diverge, it will significantly narrow the interest rate differential between the two countries, accelerating the appreciation of the yen and reinforcing the aforementioned capital repatriation trend.
4. Key points of interest for investors
4.1 Key time nodes: Focus on the results of the Bank of Japan's policy meeting on December 19, and the Federal Reserve's policy statements during the same period.
4.2 Market volatility management: In the short term, vigilance is needed regarding the risk of increased volatility in global equity and bond markets. In terms of asset allocation, consider increasing holdings in defensive sectors with stable cash flows, and pay attention to the potential impact of yen appreciation on the profits of multinational companies with significant overseas income.
