The Bank of Japan just raised interest rates to their highest level since 1995 while its own currency fell anyway, a paradox serious enough to unsettle anyone holding global assets right now.
This warning, the CEO of deVere Group, one of the world’s largest independent financial advisory organisations, noted as markets scramble to work out what happens next.
The comments from Nigel Green come as the Bank of Japan lifted its policy rate by 25 basis points to 1.25%, in a decision split 7-2 among policymakers.
The pace of tightening has quickened sharply, with this hike arriving just three months after the last one, compared with six months previously.
Top-line inflation is running at 1.9%, yet the yen still weakened to 156.64 immediately after the announcement, even after Tokyo and Washington had days earlier intervened together to defend the currency.
Japan’s 10-year government bond yield fell almost 5 basis points to 2.947% on the same day, an unusual reaction to a rate rise.
He says: “A central bank raises rates to defend its currency and support confidence in its bonds. Here, both moved the wrong way within hours.
“This is a credibility problem, and credibility problems in the world’s fourth-largest bond market don’t stay contained to Japan.”
Japanese investors are the largest foreign holders of US government debt, sitting on close to $1 trillion in Treasuries, and recent months have already brought record inflows back into domestic Japanese bond funds as that capital reconsiders where it wants to sit.
“Every basis point the Bank of Japan adds makes it more attractive for Japanese money to come home instead of funding US and European markets,” explains the deVere CEO.
“If that shift accelerates, borrowing costs everywhere get more expensive at exactly the moment governments are issuing record volumes of debt to fund their own deficits. This is a global funding story now, and it won’t stay confined to Japan.”
The 7-2 vote adds a political fault line to the mix. Dissenters Toichiro Asada and Ayano Sato, both seen as reflationists appointed by Prime Minister Sanae Takaichi earlier this year, argued the underlying economy isn’t strong enough to justify tightening, pointing to core inflation easing to 1.7% in August from 1.8% the month before.
He says: “Investors are being asked to believe two things at once, that inflation is dangerous enough to justify accelerating rate rises, and that the prime minister’s own appointees are right to say the economy can’t handle it.
“Markets hate holding two contradictory stories together, and something in that tension tends to give eventually.”
Nigel Green warns that the era of treating ultra-cheap Japanese money as a permanent feature of global markets is ending faster than most portfolios have priced in, and that the next shock, if one comes, is unlikely to announce itself in advance.
He says: “Three years ago this normalisation felt slow enough to ignore. Three months between hikes isn’t slow.
“Investors sitting in equities, emerging-market currencies or long-duration bonds without asking how much of that pricing depends on cheap yen and cheap Japanese capital are carrying a risk they haven’t stress-tested.
He concludes: “This is a moment for genuine scrutiny of portfolio exposure rather than panic.
“Japan’s shifting stance should be taken seriously risk by investors across the world.”
