Global capital is quietly adjusting its roadmap, and a storm triggered by the shift in the Bank of Japan's policy has already begun.
Bank of Japan Governor Kazuo Ueda dropped a bombshell in his speech at the beginning of December, clearly stating that he would 'weigh the pros and cons of raising the policy interest rate' at the policy meeting on December 19.
This statement caused the market's forecast for the probability of a rate hike in Japan to skyrocket from about 58% before the speech to 76%, with the probability of a rate hike by January next year reaching around 94%.
Meanwhile, the Federal Reserve is moving in the opposite direction. The market's forecast for the probability of a rate cut by the Federal Reserve in December is approaching 90%, creating a rare divergence in monetary policy.
This policy combination of 'U.S. easing and Japan tightening' is quietly changing the global liquidity landscape, rewriting the financial game rules that have lasted for thirty years.
1 Three key signals reveal the confidence behind Japan's interest rate hike
The Bank of Japan's willingness to signal interest rate hikes is supported by three key factors.
The most direct driving force is the persistent inflation pressure. In November, Tokyo's core CPI rose by 3% year-on-year, remaining above the central bank's 2% target level for 43 consecutive months. This persistent inflation phenomenon has been very rare in Japan over the past two decades.
More importantly, this inflation is gradually shifting from being input-driven to demand-driven. Since 2023, Japan's labor market improvement and rising wages have formed a 'wage-inflation' virtuous cycle, promoting sustained recovery in domestic demand.
This year, Japanese companies have an average salary increase of over 5%, reaching the highest level in decades. This 'salary growth - moderate price increase' cycle is key to Japan's economic recovery.
The performance of Japanese asset prices also provides support. Rising real estate prices are boosting real estate investment, while the wealth effect from a significant rise in the stock market supports domestic demand. These factors together create conditions for a shift in monetary policy.
2 Yen carry trade unwinding triggers global shockwaves
The enormous impact of Japan's interest rate hikes stems from its unique position as a global 'cheap funding faucet'.
In recent decades, investors have borrowed yen at Japan's extremely low interest rates and exchanged them for dollars to invest in high-yield assets, known as 'carry trades'. The scale of this trading is estimated to be as high as $1 trillion, with some estimates even reaching $20 trillion.
Interest rate hikes in Japan will lead to an increase in the cost of borrowing yen, while also pushing up the yen exchange rate, sharply compressing the profit margins of carry trades. To reduce losses, investors will quickly sell U.S. stocks and other overseas assets to repay yen loans.
This unwinding behavior has already triggered market turbulence. Following Ueda's speech, U.S. stocks fell in response, with the S&P 500 index dropping by 0.5% and the Dow Jones index declining by 0.9%. Bitcoin briefly fell below $85,000.
As the world's largest net creditor nation, Japanese investors hold about $1.2 trillion in U.S. Treasury bonds. As domestic bond yields in Japan rise, these investors may reduce their holdings of U.S. Treasuries, pulling funds back domestically, which will increase borrowing costs for the U.S. government and businesses.
3 The Asia-Pacific market faces multiple challenges, with opportunities and challenges coexisting in China.
Japan's shift in monetary policy will have significant and multidimensional impacts on the Asia-Pacific region.
The monetary policy autonomy of economies in the region is being challenged. As Japan embarks on interest rate hikes to attract capital inflow, other Asia-Pacific central banks are forced to strike a difficult balance between promoting domestic economic growth and maintaining financial market stability.
For economies like the Philippines and Indonesia, which have current account deficits, their currencies are already under depreciation pressure. To prevent capital outflows from worsening and excessive depreciation of their local currencies, the central banks of these countries may be forced to maintain higher interest rates, limiting their ability to stimulate domestic economies through interest rate cuts.
The regional trade pattern may also be reshaped due to the strengthening of the yen. The yen's appreciation will directly weaken the price competitiveness of Japanese export goods, particularly impacting key export industries such as automobiles and electronics.
Interest rate hikes in Japan may also promote more international trade to adopt RMB settlement, accelerating the process of RMB internationalization.
China holds approximately $600 billion in yen positions, accounting for 18% of its foreign exchange reserves, while China and Japan have a currency swap agreement. Significant fluctuations in the yen will affect the value of China's foreign reserves but also contain opportunities.
4 The cryptocurrency market may become a hard-hit area
As a global high-risk asset class, the cryptocurrency market may become a hard-hit area due to the liquidity contraction triggered by interest rate hikes in Japan.
The cryptocurrency market has poor liquidity and is highly speculative, making prices more prone to wild fluctuations. The global liquidity tightening triggered by interest rate hikes in Japan will significantly affect this market.
Historical data shows that when major global central banks tighten monetary policy, high-risk assets are often the first to be impacted. Recently, Bitcoin prices have experienced significant fluctuations, initially dropping below $80,000, then surging to over $95,000 due to news related to Trump.
This high volatility is particularly dangerous during tense market periods. As carry trades are unwound, global investors are forced to sell high-risk assets, and the cryptocurrency market may face greater selling pressure.
Compared to traditional financial assets, the cryptocurrency market mechanism is still not perfect, making it more susceptible to panic selling. During Japan's interest rate hike cycle, this market may become the most volatile area.
In the coming months, if the yen continues to rise with interest rate hikes, the carry trades involving the yen and other currencies may experience significant reversals, leading to a yen repatriation. Japan has massive overseas investments in Europe and Southeast Asia, which may trigger liquidity tightness and financial market turmoil in countries like Europe and Southeast Asia against the backdrop of substantial yen repatriation.
The global central bank monetary policy direction is at a 'crossroads', becoming a touchstone for testing investors' wisdom. Those high-valued assets relying on low-cost funds need to be vigilant, while fundamentally solid and low-valued assets may welcome new opportunities in this massive capital shift.
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