How the Bank of Japan’s rate hike could affect US investors
For the first time in nearly two decades, the Bank of Japan removed negative interest rates on Tuesday, which could signal potential pressure on US government bonds. In this article, we look at how the Bank of Japan’s rate hike could affect US investors.
The Bank of Japan (BOJ) announced that the bank would end its use of “yield curve control”, a measure that stops the negative interest rates that central banks used to try to bolster the country’s stagnant economy. The end of negative interest rates paves the way for the central bank to raise interest rates for the first time since 2007.
The BOJ’s move today could have an “impact” on US investors, especially if more Japanese investors start acting on the positive rates at home.
Many Japanese investors have been borrowing yen at low interest rates to buy higher-yielding US Treasuries, a practice known as the “carry trade”, during this period of negative interest rates. But with the Bank of Japan pushing interest rates higher in Japan, this trade will not work as effectively and some investors could take the money home.
“Given that Japanese institutional investors are the largest foreign holders of government bonds, central bank activity in the U.S. and Japan is important,” wrote Quincy Krosby, LPL Financial’s chief global strategist. “Concerns are growing that Japanese flows due to greater funding needs from the Ministry of Finance are increasing. from government bonds could be reversed against rising yields in Japanese bonds, especially if government yields decline as inflation slows.”
Lower demand for US government bonds could lead to higher yields
Fewer Japanese buyers of U.S. Treasurys could help send those yields higher because fewer people would be in the market for Treasurys.
Higher government interest rates can in turn lead to higher interest rates. It would make loans more expensive for all types of borrowers in the US. For example, higher government interest rates can push up mortgage rates.
The impact would not only be in the US
One reason the BOJ’s move could be felt by investors in the U.S. is due to the large amount of assets Japanese investors have in overseas investments, totaling about $3 trillion according to the International Monetary Fund.
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