China Merchants Bank: Yen carry trade may experience a sustained reversal, exerting long-term pressure on global asset liquidity

PANews December 20 News, according to Jintiao reports, China Merchants Bank released a research report stating that on December 19, the Bank of Japan raised interest rates by 25 basis points, bringing the policy rate up to 0.75%. Although the Bank of Japan is highly likely to maintain restraint in its rate hike pace, the reversal of yen liquidity and the Japanese bond market will still exert pressure on global financial conditions. First, the yen carry trade may continue to reverse, creating long-term pressure on global asset liquidity. By the end of 2024, approximately $9 trillion in positions still rely on low-interest yen for liquidity, and this liquidity is expected to gradually shrink as the US-Japan interest rate differential narrows. Second, the risk in Japanese bonds may further intensify. In the short term, Prime Minister Fumio Kishida’s government approved a supplementary fiscal budget equivalent to 2.8% of nominal GDP. In the long term, Japan plans to increase defense spending to 3% of nominal GDP and permanently exempt consumption tax. Japan’s untimely fiscal expansion stance may trigger greater market concerns, with medium- to long-term Japanese bond yields likely to rise steeply, causing the yield curve to steepen rapidly.