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Author: Long Yue, Wall Street News
As the Bank of Japan’s monetary policy meeting on December 19 approaches, market concerns about its possible hawkish interest rate hikes are growing.Will this move end the era of cheap yen and trigger a global liquidity crisis?The latest strategy report released by Western Securities on December 16 provides an in-depth analysis of this.
Inflation is high, Japan’s hawks are bound to raise interest rates
The report pointed out that there are multiple driving factors behind the Bank of Japan’s interest rate hike.First, Japan’s CPI has continued to be higher than the official inflation target of 2%.Secondly, the unemployment rate has remained at a low level below 3% for a long time, creating favorable conditions for nominal wage growth. The market has higher expectations for wage growth in next year’s “spring labor negotiations”, which will further increase inflationary pressure.Finally,Sanae’s 21.3 trillion yen fiscal policy may also exacerbate inflation.
Together, these factors are forcing the Bank of Japan to adopt a more hawkish stance.The market is worried that once interest rates are raised, it will lead to the concentrated liquidation of a large number of “arbitrage arbitrage transactions” accumulated during Japan’s YCC (Yield Curve Control) era, thereby causing a liquidity impact on the global financial market.
Theoretical dismantling: Why may the most dangerous stage of liquidity shocks have passed?
Although the market is worried, the report analysis believes that theoretically, the impact of Japan’s current interest rate hike on global liquidity is limited.
The report lists four reasons:
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Risks have been partially released: The Bank of Japan has raised interest rates three times since March last year.Among them, the interest rate hike in July last year coupled with the exit from YCC did cause a large liquidity impact, but the impact of the interest rate hike in January this year has been significantly weakened, indicating that the market’s adaptability is increasing.
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Speculation has left the market early: Judging from futures market data, most speculative yen short positions were closed in July last year.This means that the most active “arbitrage trade” that is most likely to trigger a chain reaction has receded, and the most dangerous stage of liquidity shock has passed.
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The macro environment is different: There is currently no “recession trade” similar to that seen in July last year in the United States. There is little pressure on the dollar to depreciate, while the yen itself is weak due to geopolitical and debt issues.This weakened the expectation of yen appreciation, thus easing the urgency of unwinding the “carry trade”.
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The Fed’s “Safety Cushion”: The report specifically mentioned that the Federal Reserve has begun to pay attention to potential liquidity risks and has launched a balance sheet expansion (QE-like) policy, which can effectively stabilize market liquidity expectations and provide a buffer for the global financial system.
Real risks: “catalysts” in fragile markets
The report emphasizes that theoretical security does not mean peace of mind.The current fragility of the global market is the real source of the impact that Japan’s interest rate hike may cause.The report describes it as a “catalyst”.
The report analyzed that the huge impact of Japan’s interest rate hike in July last year was due to the resonance of two major factors: “a large number of active interest rate arbitrage liquidations” and the “US recession trade”.Currently, the former conditions have weakened.However, new risks are emerging: global stock markets, represented by U.S. stocks, have experiencedThe “big buffalo” that lasted for 6 years, it has accumulated a large amount of profits and is vulnerable.At the same time, the U.S. market is concerned about“AI Bubble Theory”Concerns have resurfaced, and capital risk aversion is strong.
However, the current global stock market, represented by the U.S. stock market, has been in a “big buffalo” for six years and is inherently fragile. At the same time, concerns about the “AI bubble theory” in the United States have resurfaced, capital risk aversion is strong, and the Japanese yen interest rate hike may become a “catalyst” that induces a global liquidity shock.
In this context, Japan’s deterministic event of raising interest rates is likely to become a trigger, triggering a panic flight of funds, thereby inducing a global liquidity shock.However, the report also gave a relatively optimistic judgment: This liquidity shock will most likely force the Federal Reserve to adopt a stronger easing policy (QE). Therefore, the global stock market is likely to recover quickly after experiencing a short-term sharp decline.
Watch more, move less, and pay close attention to the “three kills of stocks, bonds, and exchanges” signals
Faced with this complex situation, the report’s advice to investors is“Look more and move less”.
The report believes that since the Bank of Japan’s decision-making is basically a “clear sign”, but the choice of funds is difficult to predict, the best strategy is to remain observant.
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Scenario 1: If there is no panic flight of funds, the actual impact of Japan’s interest rate hike will be very limited, and investors do not need to take action.
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Scenario 2: If funding panic really triggers a global liquidity shock, investors need to closely follow a key signal——Has the U.S. market experienced 2-3 consecutive “stock, bond, and foreign exchange triple kills” (i.e., the stock market, bond market, and foreign exchange market have fallen simultaneously)?.The report pointed out that if a situation similar to that in early April this year repeats itself, it will indicate that the probability of a liquidity shock in the market will significantly increase.
Finally, the report believes that even if Japan’s interest rate hike causes turmoil in the short term, it will not change the global trend of medium and long-term monetary easing.In this context, we continue to be optimistic about the strategic allocation value of gold.At the same time, as China’s export surplus expands and the Federal Reserve resumes interest rate cuts, the RMB exchange rate is expected to return to its mid- to long-term appreciation trend, accelerating the return of cross-border capital, and benefiting Chinese assets.The report is optimistic that AH stocks will usher in a “Davis double-click” in profitability and valuation.Regarding U.S. stocks and U.S. bonds, the report held a mixed view.
