Bank of Japan’s historic decision may have come at a bad time for the Fed

In an interview on Bloomberg TV discussing the Bank of Japan’s historic decision to hike interest rates for the first time in 17 years and end eight years of negative interest rates, Kathryn Rooney Vera, Chief Market Strategist of StoneX Group, provided her take on what it could mean for markets worldwide, particularly with the Fed’s deliberation around the timing for its first rate cut.

Counterintuitively, the decision could provide impetus for more growth in Japan after the negative interest rate policy was at best controversial in its effectiveness, which is why Japanese equities continued to move higher after the announcement was made.

According to Rooney Vera, getting out of negative interest rate policy increases the attractiveness of Japanese Government Bonds from a global perspective. This comes at a difficult time as the Fed is unwinding its balance sheet and has very high financing needs, which increases the chances of a higher risk premia for US treasuries over the medium to long term.

There’s somewhat of a concerning dynamic emerging, with current account surplus countries such as China, Japan, Saudi Arabia, and Russia all decreasing their holdings of treasuries, with a diversification into markets such as gold – especially for China, who diversified after the Russian sanctions.

Meanwhile, in equities, the Bank of America fund manager survey came out this week with bullish readings across the board – global growth rate expectations are at a two-year high, and risk appetite is at its highest level since 2021.

Rooney Vera urges caution, however. While the optimism may be well-placed, it hinges on core PCE figures, with the uptick we saw in the last inflation print possibly being a one-off. If it’s not a one-off and we are in fact in a reflationary environment, we may see a repricing of risk in the markets.

In conclusion, the market seems to be treating an extension of the 2023 disinflationary trend as the base case as the US economy grows above potential. Deviating from that course may lead the Fed to choose an implicitly higher inflation target, or something else may give.

Watch the full interview with Kathryn on Bloomberg here or for more insights into the global macro outlook for 2024, download our free full report:

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