$UNI
The largest interest rate hike in 30 years has encountered backlash from the market! The yen has depreciated beyond 157, and the yield on Japanese government bonds has broken through the 2% mark 一起聊聊！
After 30 years, the Bank of Japan has finally raised the policy interest rate to a high of 0.75%. It was expected to reverse the yen's downward trend, but the market directly voted with its feet - the yield on 10-year Japanese government bonds surged to 2.020%, reaching a new high since 1999, and the yen has depreciated beyond the 157 mark, completely deviating from the theoretical logic of narrowing the interest rate differential between Japan and the United States.
At the policy meeting on December 19, the Bank of Japan passed the interest rate hike resolution with a unanimous vote. This is another important move in the normalization of monetary policy following the exit from negative interest rates in 2024. Behind this is Japan's core CPI exceeding the 2% target for 44 consecutive months, with stable high inflation pressure at 3% in November, and the price transmission effect brought about by rising wages. Logically, since the Federal Reserve has started a rate-cutting cycle, the Bank of Japan's rate hike should have narrowed the interest rate differential and attracted capital back. However, the reality is completely the opposite.
The key issue lies in the market's "trust deficit" in policy: the Bank of Japan has been too cautious in advancing normalization, leading investors to doubt its determination to combat inflation. More critically, the policy mismatch of Japan's "tight monetary + loose fiscal" approach, where the central bank raises interest rates to control inflation while the government continues to expand debt to stimulate the economy, has raised market concerns about repayment capacity due to a 260% government debt-to-GDP ratio, leading to a sell-off of government bonds and pushing up long-term interest rates.
It is important to note that the 2% yield level on Japanese government bonds has not been effectively broken since 2006. This breach signifies a shake in market confidence regarding the fundamentals of the Japanese economy. Bank of Japan Governor Kazuo Ueda has hinted that further rate hikes may continue, but the market has already seen through its gradual tightening approach.
This once-in-30-years rate hike operation is either a breakthrough for the Japanese economy to escape deflation or a dangerous leap that exacerbates debt risks. Do you think the yen will fall below 160? Will the Bank of Japan be forced to accelerate rate hikes next year?
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