Why is the Japanese interest rate hike market so sensitive?

The main reason is the concern that the impact of the 8.5 shock in 2024 might reoccur?

Everyone is worried that Japan's interest rate hike will lead to a massive retreat from carry trades. In fact, there were many discussions about this after August 5th last year, and various grand narratives began to emerge. I remember discussing the issue of Japan's interest rate hike several times before, but looking back now, my views have changed somewhat since then. The market's information is composed of fragments, and each additional fragment provides a different picture!

At that time, I felt that Japan's interest rate hike was like a big thunderstorm, but now it feels somewhat different. First, the positioning system is not as exaggerated as it was then; this time it feels more like a continuation, not the beginning of a new cycle.

Then there’s the positioning structure: last year, everyone was uniformly bearish on the yen, with shorts piling up absurdly above 150. When the yen rebounded, a large number of shorts were forced to cover, leading to the panic. This year is completely the opposite; the market is mainly bearish on the dollar. The short positions on the yen have been cut down to half of last year's, as shown by CME data. Now, the yen market does not have the same “thunderstorm” as last year.

Including last year's sudden attack and the recession buff, which are absent this year. The lethality of last year's incident mainly came from the “unexpected.”

This year, the fiscal stimulus is too aggressive, long-term bonds have been left stunned, and the market is worried about debt, forcing the Bank of Japan to intervene to stabilize the exchange rate.

The key point is: Naoki Tamura mentioned last year that “the interest rate will see a maximum of 1%.” This essentially tells the market: Japan is not playing the high-interest-rate game. Naturally, it is not as frightening as last year. Japan aims to pull the interest rate from extremely low to “somewhat normal” levels; it will still be a low-interest-rate country in the long term and will not suddenly change to a style like the United States.

This time there is indeed an impact, but it is completely different from last year's level of “scaring half a life away.”

More so, it is a routine correction, without such grand storylines.