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

Bank of China: Yen Carry Trade May Experience Long-Term Reversal, Putting Long-Term Pressure on Global Asset Liquidity

The Bank of China 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 a cautious pace of rate hikes, the reversal of yen liquidity and the Japanese bond market will continue to exert pressure on global financial conditions.

First, the yen carry trade may experience a sustained reversal, 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, the Sano 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 reduce consumption tax. The Japanese government’s untimely fiscal expansion stance could trigger greater market concerns, with medium- to long-term Japanese bond yields likely to rise steeply, and the yield curve accelerating its steepening. (Jin10)