China Merchants Bank: The yen carry trade may continue to reverse, suppressing global asset liquidity for a long time

China Merchants Bank released a research report saying that on December 19, the Bank of Japan raised interest rates by 25bp, raising policy rates to 0.75%. Although the Bank of Japan is likely to maintain a high degree of restraint in the pace of interest rate hikes, the reversal of yen liquidity and the Japanese bond market will still suppress global financial conditions.
The first is that the yen carry trade may continue to reverse, forming a long-term suppression of global asset liquidity. By the end of 2024, there are still about 9 trillion dollars positions that rely on low-interest yen as a source of liquidity, and this part of the liquidity may shrink steadily in the future as the US-Japan interest rate spread narrows. Second, the risk of Japanese bonds may further ferment. In the short term, the government of Takayama has approved a supplementary fiscal budget equivalent to 2.8% of nominal GDP. In the long run, Japan plans to raise defense spending to 3% of nominal GDP and permanently reduce consumption tax. The Japanese government's untimely fiscal expansion stance may cause greater concerns in the market. Medium and long-term Japanese bond yields may rise sharply, and the curve will accelerate and steepen. (Jin Ten)