Japan’s hike

The Bank of Japan hiked rates by a 75 bps. Out of the major economies in the world is the only one hiking, trying to control inflation and the subsequent jump in long term yields.While the U.S. is on a mission to lower rates to avoid problems with unemployment, risking a potential spike in inflation, Japan needs to control its borrowing costs, ending years of stimulus. The 10 year JGB, has already reached 2%. Five years ago, it was yielding zero. 2 years ago, it was yielding 0.25%. Now is almost 10 times higher. Imagine what that can do to banks and insurance companies bond portfolios. The implications for the U.S. are potentially big: it can stop and reverse the Yen carry trade, where investors don’t have the incredibly low interest rates to borrow from. Furthermore, Japan may become a next seller of U.S. treasuries, and repatriate dollars to strengthen the Yen and reduce yen denominated debt, and the contagion mechanism for a global crises be activated.

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