Uncertainty in Exchange Rates and Stock Markets Grows Amid Japan's Tightening... Bond Yields Rise Worldwide Expectedly

Kuroda Draws Line Saying "No Interest Rate Hike," but Reaffirms Global Tightening Stance
Domestic Market on High Alert for Aftershocks

[Asia Economy Reporter Haeyoung Kwon] As the Bank of Japan (BOJ) revised its monetary easing policy for the first time in 10 years, global financial markets are increasingly expecting that Japan will join major countries such as the United States and Europe in tightening monetary policy and raising interest rates by next spring. Although BOJ Governor Kuroda drew a line by saying "this is not an interest rate hike," Japan's 'surprise announcement,' the last bastion, reaffirmed to the market that the global tightening trend will continue. It is forecasted that uncertainty in the foreign exchange market, including the yen, as well as bond and stock markets, has increased further.

According to major foreign media on the 20th (local time), following the BOJ announcement, the yen's value surged more than 4%, marking the largest daily gain in 24 years. As the interest rate gap between the U.S. and Japan is expected to narrow, yen purchases increased in the market, causing the dollar-yen exchange rate to fall from the previous 137 yen range to as low as 130.58 yen during intraday trading. This is the lowest level since August. At 11 a.m. in the Tokyo foreign exchange market on the same day, the dollar-yen exchange rate was trading at 132.14 yen, up 0.34% from the previous day.

With Japan joining the global tightening trend, investment sentiment weakened, and stock markets showed a downturn. The Nikkei 225 index in Japan fell 2.5% the previous day. The Hong Kong Hang Seng Index and the Shanghai Composite Index dropped 1.3% and 1.1%, respectively. The KOSPI index fell 0.8% but was up 0.21% as of 10:13 a.m. that day. The U.S. New York stock market rebounded, with the Dow Jones Industrial Average rising 0.28%, but there remains considerable skepticism about whether this upward trend will continue.

[Image source=Yonhap News]

Experts believe that the aftereffects of the BOJ's measures may continue for some time in global stock and bond markets. If yen carry trade funds, which had flowed overseas due to the yen's depreciation and low interest rates, attempt to return home, it could lead to Japanese investors selling overseas assets. This would result in rising bond yields in various countries worldwide. Notably, after the BOJ's announcement the previous day, the U.S. 10-year Treasury yield rose by 10 basis points (bp = 0.01 percentage points) to 3.7%.

South Korea is not free from the aftereffects of the BOJ's tightening. The 10-year Korean government bond yield closed at 3.603% the previous day, jumping 0.208 percentage points from the previous day’s 3.395%. If Japan, which holds a large amount of U.S. Treasury bonds, sells U.S. Treasuries and yields rise, South Korea’s bond yields will also rise in a chain reaction. This will lead to higher household loan interest rates, increased corporate bond issuance costs, and borrowing expenses, further increasing the burden on households and companies. Deutsche Bank analyzed that "the BOJ's tightening policy means the opportunity to borrow at low cost has disappeared."

Bloomberg stated, "Many economic experts expect the BOJ to raise interest rates next year," adding, "Japan will also end its exceptional stimulus measures of the past decade and join the ranks of the U.S. Federal Reserve (Fed) and the European Central Bank (ECB)."

This content was produced with the assistance of AI translation services.