China Merchants Bank: Japan's resumption of interest rate hikes may put downward pressure on global financial conditions.

A research report released by China Merchants Bank stated that on December 19th, the Bank of Japan raised interest rates by 25 basis points, increasing the policy rate to 0.75%. Although the Bank of Japan is likely to maintain a highly restrained pace of rate hikes, the reversal in yen liquidity and the Japanese bond market will continue to exert downward pressure on global financial conditions. Firstly, yen carry trades may experience a sustained reversal, exerting long-term downward pressure on global asset liquidity. As of the end of 2024, approximately $9 trillion in liquidity will still be sourced from low-interest yen; this liquidity may steadily shrink as the US-Japan interest rate differential narrows. Secondly, Japanese bond risks may further escalate. In the short term, the Sanae Takaichi 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 the consumption tax. The Japanese government's untimely fiscal expansion stance may trigger greater market concerns, potentially leading to a steeper rise in medium- and long-term Japanese bond yields and a faster steepening of the yield curve. (Jinshi)