Japan Rate Hike In The Cards

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The Bank of Japan is expected to resume interest rate hikes soon and JGB yields are rising. Will we see another major yen carry trade unwind, like in mid-2024?

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Bank of Japan Governor Kazuo Ueda has given the strongest signal yet that the central bank may resume interest rate hikes later this month, pushing the yen and bond yields higher on Monday. The sharp jump in Japanese government bond yields is stoking carry-trade concerns and weighing on risk assets.

Clear hint: Ueda said the BOJ will “consider the pros and cons of raising the policy interest rate and make decisions as appropriate,” in light of improving economic activity and prices. He said the uncertainties surrounding U.S. tariff policies are receding, and the likelihood of the BOJ’s economic and price projections being met is gradually increasing. Market participants are now betting on the BOJ raising its policy rate to 0.75% at its Dec. 18-19 meeting, with the odds currently at about 80%. The last hike was in January, when the BOJ raised the rate to 0.5% – the highest level in 17 years.

Market impact: The yen (JPY:USD) strengthened as much as 0.5% to 155.4 per U.S. dollar. The 2-year yield, the most sensitive to policy expectations, as well as the benchmark 10-year yield rose to their highest levels since 2008. “Aside from explicitly saying the BOJ is considering the pros and cons of a hike, he hinted that there is no clear opposition by new Prime Minister Sanae Takaichi to raising rates,” said Francesco Pesole, FX strategist, ING. “This second factor had been crucial for markets, whose basic understanding was that Takaichi was a dovish-leaning influence.”

Yen carry trade: Meanwhile, investors are assessing the risk that rising Japanese bond yields could unwind long-standing yen-funded carry trades. Japanese institutions have been major buyers of overseas bonds, including U.S. Treasuries, and higher domestic yields raise the risk of capital being repatriated. Societe Generale strategist Albert Edwards — who refers to himself as an Uber Bear — recently described the surge in JGB yields as the most significant threat to global markets since the post-crisis era of bond-yield suppression began, warning it could undermine the equity bull market. Take the WSB survey.

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Today’s Markets

In Asia, Japan -1.9%. Hong Kong +0.7%. China +0.7%. India -0.1%.
In Europe, at midday, London -0.1%. Paris -0.7%. Frankfurt -1.3%.
Futures at 6:30, Dow -0.5%. S&P -0.6%. Nasdaq -0.7%. Crude +1.1% to $59.22. Gold +0.8% to $4,287.10. Bitcoin -5.3% to $86,373.
Ten-year Treasury Yield +2 bps to 4.05%.

On The Calendar

Companies reporting today include Credo Technology (CRDO) and MongoDB (MDB).

See the full earnings calendar on Seeking Alpha, as well as today’s economic calendar.