Less than two weeks ago, Japan's foreign exchange, stock and bond markets experienced turmoil. Now, a new crisis may be approaching again.

Japan's fiscal year is coming to an end, and many markets around the world will be closed for Easter this Friday (March 29). This is the first time since 2018 that the Easter holiday falls exactly at the end of March. While traders from other countries and regions are vacationing in the United States, the Japanese market, which is trading normally, may be trembling.

In fact, the United States left two bombshells while the market was closed, including the Fed's favorite inflation expectations indicator and Fed Chairman Powell's speech.

Inflation data could distort USD/JPY moves by fueling views that a rate cut may not be coming soon. The dollar rose against the yen to its highest level since 1990 on Wednesday, prompting Japanese authorities to step up warnings of foreign exchange intervention.

Yoshio Iguchi, managing director of Traders Securities Co. in Tokyo, said: "Be wary of unexpected fluctuations in the foreign exchange market. From March 29, the liquidity of the Tokyo market will decrease, and the bid-ask spread will continue to widen after entering the European session, which means Arbitrage trades are likely to increase."

Meanwhile, Japanese stocks will lack guidance from U.S. markets, leaving them vulnerable to profit-taking after outperformance this year. After the Bank of Japan took a historic policy move on March 19, domestic investors began to adapt to positive interest rates. This Friday is the last trading day of this fiscal year in Japan. Japanese domestic investors will conduct final settlement and position adjustment, which will further intensify risks.

The following are some factors that may affect the Japanese market:

FX intervention threat

The Bank of Japan's first interest rate hike since 2007 failed to stem the yen's decline, meaning policymakers have no choice but to buy yen to support it. As central bank officials reiterated that financial conditions will remain loose, investors expect U.S.-Japan interest rate differentials to remain elevated.

Iguchi said: “From a risk-reward perspective, it is unlikely that people will choose to buy the U.S. dollar and hold it when the U.S. dollar is at 151 yen, because the risk of intervention by the Japanese authorities may directly push the exchange rate lower for 5 days. Yuan. But at the same time, USD/JPY is also likely to test 152 as illiquidity amplifies price swings.”

Decline in liquidity

The U.S. will release its personal consumption expenditures (PCE) index on Friday, which Fed officials tend to use to measure inflation, a key factor in when the central bank begins cutting interest rates.

Any sign of whether the U.S.-Japan interest rate differential will narrow could impact USD/JPY trading. Japanese government bond yields are also affected by moves in U.S. Treasury yields, so it will be harder for the Japanese bond market to find direction without a clear U.S. market reaction to Friday's data.

U.S. markets are set to reopen on Monday, but other major economies such as Australia, Britain, France and Germany remain closed. According to the recommendation of the Securities Industry and Financial Markets Association, U.S. Treasury bond trading will end early at 3 p.m. Tokyo time on April 1.

Japanese stock investors take profits

Bank of Japan Governor Kazuo Ueda's interest rate adjustment last week did not dampen confidence in the Japanese stock market. The Nikkei 225 Index (NK225) hit another record high. The index is up about 20% so far this year, making it the best-performing blue chip stock in the world. index, but there are concerns that the increase may be too large. The broader Topix index is just 4% shy of its all-time high set in December 1989.

Ryuta Otsuka, a strategist at Toyo Securities Co., said: "The usual behavior pattern of the Bank of Japan is to sell in early April and take profits, so I am not that optimistic about the trend early next week. The Nikkei index is currently around 40,000 points, and again It’s close to 41,000, so there could be a lot of selling.”

End of quarter rebalancing

Junichi Hashimoto, a quantitative analyst at Daiwa Securities, wrote in a report this month that changes in the Nikkei 225 on the last day of March could cause some stocks to move as investors adjust their portfolios.

Toyo Securities' Otsuka said quarter-end rebalancing could make it more difficult to gauge supply and demand in the stock market.

Article forwarded from: Golden Ten Data