This is not an April Fool's joke......

Finance Associated Press, March 28 (edited by Xiaoxiang) "The Bank of Japan's interest rate hike has caused turmoil in the foreign exchange market, Japan's fiscal year is coming to an end, and many countries in Europe and the United States are about to usher in the Easter holiday" - what does it mean if these factors are kneaded together?

Many Japanese institutions are now worried that this could mean a sharp rise in short-term risks to Japan's foreign exchange, equity and bond markets.

According to the economic calendar, this Friday (March 29), the United States, Canada, Australia, New Zealand and most of Europe will be closed for Good Friday, and the Hong Kong market will also be closed for one day, and north-south trading will be closed. On next Monday (April 1), markets in Australia, most of Europe and Hong Kong will remain closed for the rest of the day due to Easter Monday.

This is the first time since 2018 that the Western Easter holiday falls entirely at the end of March – Easter Monday (April 1) is even the same day as April Fool's Day.

However, with most of the world's major markets closed, this may not be good news for some Asian markets that are still trading normally, especially the Japanese market, which has recently experienced a major central bank policy shift!

In fact, although the US market is closed, the country's news will still leave two "big holes" for global investors on Friday - Fed Chairman Jerome Powell's speech and the February PCE price index. If Powell's hawkish rhetoric or US inflation data show stickiness again, the closed US stock market will indeed "escape", but the Asian stock market, which opens next Monday, will bear the brunt.

In the 24-hour foreign exchange market, a U.S. inflation gauge released on Friday could further distort the yen against the U.S. dollar if it fuels the view that U.S. interest rates won't be cut anytime soon, as many U.S. traders are on vacation and thin liquidity is bound to exacerbate volatility. Any movement at this point in time will be particularly sinister for the yen after the yen hit its weakest level against the dollar on Wednesday since 1990, prompting the Japanese authorities to step up warnings about intervention in the foreign exchange market.

At the same time, Japanese equities have been particularly vulnerable to profit-taking after a stellar year in the absence of guidance from the US market. Domestic investors are still adjusting to positive interest rates after the Bank of Japan's historic campaign to end negative interest rates on March 19 – and this Friday, which is also the last trading day of the fiscal year, will further exacerbate the risk as domestic investors will make final settlements and rebalancings.

Here are the top four disruptions that the Japanese market may face this holiday in Europe and the United States:

Threat of intervention

This month, the Bank of Japan's first interest rate hike since 2007 did not stop the pace of the yen's depreciation, but instead added to the decline, suggesting that Japanese policymakers have no choice but to buy their own currency directly in the foreign exchange market to support the yen.

Bank of Japan officials have repeatedly reiterated after last week's rate hike that Japan's financial conditions will remain accommodative, so interest rate differentials between the United States and Japan are expected to remain large for the foreseeable future.

Yoshio Iguchi, managing director of Traders Securities Co, said, "From a risk-reward perspective, it is unlikely that people will choose to buy USD/JPY at the JPY 151 level and hold it all the time, because the risk of [Japanese] intervention has the potential to pull the exchange rate down by 5 yen directly." But at the same time, USDJPY could still test 152 as a lack of liquidity amplifies price volatility. ”

Liquidity decreases

The PCE price index, the Fed's favorite inflation gauge, will be released this Friday. This measure of consumer spending is important for the Fed to set policy, as Fed officials are expected to focus on the data to negotiate exactly when to start cutting rates and how many times throughout the year.

The data and Powell's speech on the same day coincided with the closure of the European and American stock markets, and the holiday atmosphere may also lead to a lack of liquidity in the foreign exchange market. Historically, JGB yields have been affected by the movement of US Treasury yields, so the lack of a clear reaction to Friday's data will make it more difficult for the JF market to find its way.

U.S. stocks will reopen on Monday, but other major markets, including Australia, the United Kingdom, France and Germany, will remain closed.

"Be wary of unexpected movements in the foreign exchange market," Iguchi said. It is expected that from March 29, liquidity in the Tokyo market will decline, and bid-ask spreads will continue to widen after entering the European session, which means that carry trades are likely to increase. ”

Profit-taking in the new fiscal year

Bank of Japan Governor Kazuo Ueda's interest rate hike last week did little to dampen the bullish sentiment in Japanese equities, and the Nikkei 225 average has since hit new highs. The Nikkei 225 has risen about 20% year-to-date, making it one of the world's best-performing stock indexes, but it has also heightened fears that the Nikkei 225 may be overbought.

The broader Topix Index is now about 4 percent away from its all-time high set in December 1989.

Ryuta Otsuka, a strategist at Toyo Securities, said, "The usual pattern for Japanese banks is to sell and take profits in early April, so I'm not too optimistic about the beginning of next week." The Nikkei 225 has risen above 40,000 points to near 41,000 points, which could usher in a considerable number of selling orders. ”

End-of-season rebalancing

Daiwa Securities Co. Quantitative analyst Junichi Hashimoto wrote in a note this month that changes in the Nikkei 225 index on the last day of March could also contribute to volatility in some stocks as investors adjust their portfolios.

Toyo Securities' Otsuka said the quarter-end rebalancing effect could make it more difficult to gauge supply and demand in equities.

(Finance Associated Press Xiaoxiang)