Japan's interest rate hike curse! Is the financial storm coming? Historically, Japan has experienced many global financial turmoil after raising interest rates: the collapse of technology stocks in 2000 and the subprime mortgage crisis in 2007

2024-08-06 14:08:28

Japan's interest rate hike curse! Is the financial storm coming? Historically, Japan has experienced many global financial turmoil after raising interest rates: the collapse of technology stocks in 2000 and the subprime mortgage crisis in 2007

National Business Daily

2024-08-06 07:57Published on the official account of Sichuan Daily Economic News

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01 The appreciation of the yen triggered the unwinding of the carry trade, causing global stock markets to plummet, with the Nikkei 225 index recording the largest drop in history.

02 United States non-farm payrolls data broke out, triggering fierce discussions in the market about the Fed's interest rate cuts, exacerbating market panic.

03 Warren Buffett recently sold Apple stocks, which attracted market attention and intensified the panic effect in the market.

04After the Bank of Japan raised interest rates, US stocks crashed, triggering a global financial crisis, and the market was worried that Japan may break out again in a financial turmoil.

05Experts believe that RMB assets are expected to become a "safe haven" for global funds, because China's economy, policy and corporate earnings prospects are relatively certain, and valuations are at a low level.

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Every reporter: Wen Qiao, Cai Ding, Zhao Jingzhi, every editor: Yi Qijiang, Lan Suying

Japan's interest rate hike curse! Is the financial storm coming? Historically, Japan has experienced many global financial turmoil after raising interest rates: the collapse of technology stocks in 2000 and the subprime mortgage crisis in 2007

On August 5, the "Black Monday" swept in, starting from Japan and South Korea, and the stock markets of many countries encountered bloody storms.

According to the analysis of economists and experts interviewed by the reporter of the "Daily Economic News", behind the collapse of the global stock market is the "ebb tide" of the arbitrage trade under the appreciation of the yen, and a large number of institutions that borrowed the yen to invest in the stock market sold stocks to repay the yen, and the market's fears of a United States recession have also exacerbated the plunge.

Somewhat surprisingly, recently revealed data showing that Warren Buffett has reduced his holdings in Apple by nearly half, with Bloomberg describing the incident as: "A butterfly flapped its wings on Wall Street, and then triggered a Tokyo typhoon." ”

The decline in global stock markets is also reminiscent of the subprime mortgage crisis of 2007. Looking back on history, the Bank of Japan raised interest rates twice in 2000 and 2006~2007, after which the US stock market ushered in a "crash", triggering the global financial crisis.

This time, the eye of the storm has become Japan, is it another harbinger of a financial storm?

The yen has risen in interest rates and appreciated

"A large number of investors dumped stocks to repay the yen"

On the morning of August 5, the Japanese and South Korean stock markets ushered in a violent sell-off as soon as they opened, and then panic spread around the world. By the end of the day, the Nikkei 225 Index had fallen 12.4%, erasing the year-to-date gains in 2024 and setting the largest drop in history, surpassing the record of Black Monday in October 1987. Korea's composite index posted its biggest drop since 2008, and major stock markets in Japan, South Korea and Turkey triggered circuit breakers. Asia-Pacific markets such as Australia and India have seen sharp sell-offs, and European stocks have also suffered heavy losses after the open.

Subsequently, U.S. stocks opened lower, and the "Big Seven" opened with heavy losses across the board. In the early morning of this morning, Beijing time, the three major U.S. stock indexes collectively closed sharply lower, with the Dow down 2.6%, the Nasdaq down 3.43%, and the S&P 500 down 3%. Popular technology stocks generally fell, with Nvidia and Intel falling more than 6%, and Apple, Tesla, and Google falling more than 4%.

Investors are really surprised by such a widespread decline in global financial markets, but they also have to wonder why the world has suffered such a heavy setback. Why is Japan's stock market under pressure again?

Many industry insiders believe that the global stock market suffered from Black Monday, due to multiple shocks: weak United States employment and economic data hits, superimposed Japan on the surge in the yen after the central bank's rare interest rate hike last week, and geopolitical tensions in the Middle East, global investors' confidence was frustrated.

Last week, the Bank of Japan adjusted its policy rate from 0% to 0.1% to 0.25%. The rate hike is the first since the negative interest rate policy was abandoned in March this year. The yen's subsequent appreciation also exacerbated the decline in Japanese stocks, which led to a particularly bearish factor that led to a decline in the performance of Japan companies.

Dr. Zhang Ling, chief economist of Huatong Securities International, pointed out in an interview with the "Daily Economic News" that "the direct cause of the overall collapse of the Asia-Pacific market is still due to the liquidation caused by arbitrage hedging. Against the backdrop of (previously) the depreciation of the yen and record highs in Asia-Pacific equities, institutional investors lent yen through carry trades to invest in Asia-Pacific stock markets, including Japan. However, the rapid appreciation of the yen due to the decline in the dollar index and other reasons has led to a large number of institutional investors selling stocks to repay the yen, which has led to huge volatility in the stock market these days. ”

Foreign investors have sold a net 1.56 trillion yen of Japan cash stocks and futures in the week ending July 26, according to data released by the Japan Exchange Group.

Dr. Zhang Ling said, "The volatility of the yen is an alternative among major currencies. At the moment, whether it is the yen or Japanese stocks, the huge volatility has created unpredictable risks in the market. In terms of the external environment, the US dollar interest rate cut is imminent, and there may be further interest rate cuts in the future. The Japan BoC's hawkish stance on the yen suggests that further interest rate hikes are possible. ”

Naoyuki Yoshino, former president of the Asian Development Bank Research Institute, previously believed in an interview with reporters that the previous sharp rise in the Japan stock market was related to the large influx of foreign capital into the market, and ultimately pointed to the depreciation of the yen at that time. With the tightening of monetary policy in Europe and United States, Japanese stocks have become a safe haven option for foreign investors.

Rafael Nemet-Nejat, managing partner of Singapore's Jin Investment Management (Rafael for short), told the Daily Economic News: "When the Ministry of Finance of Japan intervenes in the yen and the CPI released by the United States is lower than expected, the market will fall." These factors were exacerbated by the rare rate hike and hawkish stance of the Bank of Japan at the end of last month, as well as the dovish tone of the Fed signaling that it would cut rates in September. Such a shock led to the unwinding of the carry trade on the yen. ”

Non-farm payrolls data "upset"

"More pessimistic outlook for the global economy"

The industry also believes that the global Black Monday triggered by the Japan stock market crash on August 5 is not only the appreciation of the yen, but also the blow of the United States non-farm payrolls data.

On Friday, a buzzing United States non-farm payrolls report for July sparked an "earthquake" in U.S. stocks and sparked heated discussions about how much the Fed might cut interest rates next month.

The United States unemployment rate surged 0.6 percentage points from its year-to-date low, triggering the "Sam rule" that predicts a recession based on the unemployment rate.

The rule states that a recession could begin when the three-month moving average of the United States unemployment rate rises by more than 0.5 percentage points from its lowest point in the past 12 months. This rule has been 100% accurate since the 70s of the last century. The July unemployment rate data has already touched this threshold, which means that the current United States may have entered a recession.

After the release of the data, the three major U.S. stock index futures, the U.S. dollar index and Treasury yields fell rapidly, and the panic spread accelerated. Traders are starting to bet on the possibility of a 50 basis point rate cut by the Fed in September and are forecasting a rate cut of more than 110 basis points this year.

"In fact, the global market is likely to weaken further, and we are now back to where we were at the start of the AI boom last fall. However, now that we are more pessimistic about the outlook for the global economy, there is more downside for the United States economy and markets, which means that the market may not be ready to stabilize. Rafael told the reporter of "Daily Economic News".

"Most importantly, there is still uncertainty about the United States election, with Trump and Harris currently evenly matched, and the conflict in the Middle East, Iran and Israel has a tendency to escalate. The impact of these geopolitical and macro factors has also led to the liquidation of long positions built on a weak yen, the AI boom and the 'soft landing' scenario of the United States economy this year, so the market has seen sharp volatility. Rafael added.

Claudia Sahm, a former Fed economist and author of the Sam Rule, said that while the United States is not yet in a recession, it is "troubly close to a recession." Sahm believes that as financial markets plummet, what many consider to be the "scary word" is becoming more likely.

Warren Buffett sells stocks

"Triggered a typhoon in Tokyo"

In addition to the weak economic data in United States and the regulation of the central bank in Japan, Buffett's recently disclosed move also made global investors smell the risks and exacerbated the panic effect of the market.

According to Berkshire's latest second-quarter report for the second quarter of this year, as of the end of the second quarter of this year, Berkshire's holdings of Apple shares were worth $84.2 billion, and Apple's holdings in the second quarter fell from 789 million shares in the first quarter to about 400 million shares, a decrease of nearly 50%.

Berkshire's cash reserves rose to $276.9 billion from $189 billion in the first quarter, largely due to the company's net sale of $75.5 billion worth of shares. This is also the seventh consecutive quarter that Berkshire has sold more shares than bought them.

Bloomberg described the incident as "a butterfly flapping its wings on Wall Street, which triggered a Tokyo typhoon." ”

The collapse in global stock markets is also reminiscent of the 2007 subprime mortgage crisis, a once-in-a-century financial crisis in which most investors lost a lot of money and many wealthy people lost their fortunes.

Under the nest, Ann has finished eggs? But Warren Buffett is an exception. As early as 2003, Warren Buffett reportedly purged all financial products related to subordinated debt. At that time, Buffett had more than $30 billion in cash on hand.

This time, as U.S. technology stocks encountered a "darkest moment", and the technology "Big Seven" caused a market panic due to the disproportionality between AI spending and earnings, Warren Buffett sold Apple shares again, which indeed makes people have to speculate, is this another harbinger of a crisis?

After Japan's last two interest rate hikes

Both have had a global financial crisis

Looking back at history, after Japan's two interest rate hikes, US stocks crashed and the global financial crisis occurred.

In August 2000, the Bank of Japan adjusted interest rates from 0% to 0.25%. The United States stock market entered a four-year bear market after the second surge, and the Internet bubble officially burst; In July 2006 and February 2007, the Bank of Japan raised interest rates by 0.25% twice in a row. In the month of the second rate hike, many Asian stock markets plummeted. United States stocks then consolidated at high levels, and by December 2007, the Nasdaq reached its stage high, followed by a crash and a subprime debt storm.

This time, the eye of the storm has become Japan, is it another harbinger of a financial storm?

Japan's long-standing high share of government debt and long-overdue "balance sheet reduction" have added to concerns. Although the Bank of Japan gradually reduced its government bond purchases from the current monthly rate of about 6 trillion yen last week to about 3 trillion yen per month from January to March 2026, Japan has long been criticized for its imminent debt crisis and may face the risk of financial collapse before the current round of "balance sheet reduction" begins.

In June, BofA executives noted that Japan government bond yields were at high levels and that about half of Japan's government bonds were held by the Bank of Japan, which were signals of a possible debt crisis in Japan. If Japan eventually experiences a financial crisis, it could slowly "export" its long-accumulated economic and financial problems to the rest of the world, eventually leading to the collapse of the global financial system.

As early as 2015, the International Monetary Fund reportedly took the lead in calculating the Japan endless debt monetization, warning that the central bank would need to scale back its purchases of Japanese bonds in 2017 or 2018 "given the collateral needs of banks, the asset-liability management constraints of insurance companies Japan, and the asset allocation targets of major pension funds." The IMF also noted that when the Bank of Japan holds about 40% of the bond market share, it will lead to a market crash.

However, as of March 2024, the Japan BOJ's holdings of Japan government bonds have far exceeded the 40% share warned by the IMF to 53.2%, the data showed. The Bank of Japan holds the largest share of Japan's government bonds.

In addition, Japan's total national debt to GDP ratio is 257.19%, the highest among major economies. According to the National Financial Securities Research Report, as of the end of May, the total assets of the Bank of Japan reached 761 trillion yen, and the government securities held 597 trillion yen, accounting for 78.4% of the total assets.

However, CICC believes that there is a historical record of global recession shortly after the Bank of Japan raised interest rates, but the reason may not come from the Bank of Japan, but because the Fed's policy rate has remained high for a long time.

In an interview with the Mainichi Economic News, Takahiro Sekido, chief Japan strategist at Mitsubishi UFJ Financial Group and former head of macro stress testing at the Bank of Japan, said, "We don't think the current global market pressure is similar to the past financial crises. However, the current strength of the interdependence of the international financial system was evident in the collapse of stock prices in the Asia-Pacific region on August 5. ”

Rafael agrees that this will not lead to a new financial crisis, as the global financial system is now more stable. But he also noted that the current situation is a bubble that is bursting with a lot of geopolitical uncertainty, which may be more akin to the oil crisis that occurred during Nixon's presidency.

Takahiro Sekido pointed out to reporters that in essence, strong global inflation, falling commercial real estate prices, and insurance payouts due to turmoil in global IT systems have led to the recent adjustment in global financial markets. In the short term, market volatility is likely to persist due to the knock-on effect of asset disposal and liquidation, as investors can only strengthen risk management by disposing of risky assets and securing cash flows.

RMB assets are promising

Becoming a "safe haven" for global funds

On 5 August, with Wall Street traders pricing in a 60% chance of a 25bp Fed rate cut within a week, the next moves for JPY and Japanese stocks will be more closely watched.

On August 5, the yen rose above the 146 mark against the US dollar for the first time since February this year.

Looking forward to the future trend of the yen, Tokai Securities analysis believes that it still depends on the Fed's actions. Although the Bank of Japan raised interest rates more than the market expected, Japan's quantitative easing policy has not been fully withdrawn, and the policy stance of the Bank of Japan remains accommodative. As Japanese bond rates continue to fluctuate less than U.S. bonds, the yen exchange rate still depends on the Fed's policy stance.

For investors, Dr. Zhang Ling said: "From the perspective of investment operations, it is not recommended that investors continue to buy Japanese stocks in the short term, or in turn to chase the yen. Gold's traditional safe-haven properties may make it a good choice. But it should also be noted that the price of gold has also reached a record high. At least the current point in time is a huge volatile stage of rapid reallocation of market resources, and it is difficult to predict the price trend in a short period of time, so it is recommended that ordinary investors still be cautious and keep an eye on it. ”

Zhou Maohua, a macro researcher at the financial market department of Everbright Bank, believes that the economic slowdown in developed economies, the pressure on corporate earnings prospects, geopolitical conflicts, trade protectionism, United States election risks, etc., overseas market volatility has increased, coupled with the current overall high level of overseas asset stocks, the risk has increased compared with the return. China's economic, policy and corporate earnings prospects are relatively certain, and RMB assets with low valuations are expected to become a "safe haven" for global funds.

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