The Rate-Hike Cycle Turns Global as the Bank of Japan Moves

The Bank of Japan raised interest rates on Friday to their highest level in 31 years, taking the policy rate to 1.25%, with two dissenting votes and no explicit signal on what comes next¹. Other accounts date the level to a 30-year high and describe it as a warning shot to markets, noting it is the highest since 1995². The increase itself was 25 basis points³. Tokyo markets are closed for much of this week, and the new 1.25% rate takes effect on Thursday^5,12.

Governor Kazuo Ueda signalled that further tightening remains possible³. The yen has continued to slide, with the dollar rising against it for a fifth session in six after the split vote⁵, and traders are now watching for possible intervention¹. Japan has had little opportunity to react to the decision because of the market holiday¹².

A synchronised turn

Both the Federal Reserve and the Bank of Japan raised rates at meetings last week^4,6. The European Central Bank raised rates earlier this month⁸. Australian forecasters have now joined in: ANZ and CBA have added their names to two other large lenders in predicting a Reserve Bank of Australia rate rise next week, with expectations of more increases to come⁴.

Research houses are describing this as the start of a global rate-hike cycle^7,9. One note points out that the same pattern is visible in central bank balance sheets: on a year-to-date basis the Fed’s balance sheet stood at around USD6.7t, some 61.6% above the CY19 level⁷. Indian market commentary is framing the same question for emerging markets, asking what the combined Fed and Bank of Japan moves mean for local equities⁹.

What to watch

Analysts warn that markets risk underpricing the scale of what is coming. Deutsche Bank analysts wrote that increased hawkishness among central bankers suggests rate hikes will arrive faster and more frequently¹⁰. Lombard Odier anticipates an additional 75 basis points of increases by the Bank of Japan, and points to high energy prices as the driver of further tightening across the Bank of Japan, the Swiss National Bank and the Bank of England¹¹.

European equities have so far absorbed the shift, with the STOXX 600 rising on a technology rally and easing oil prices, though European economies remain vulnerable to a rise in oil prices given their heavy import dependence⁸. The immediate markers are the currency and the calendar: whether the yen’s slide forces intervention¹, whether the Reserve Bank of Australia validates the forecasters next week⁴, and whether the energy prices that Lombard Odier identifies as the driver keep rising¹¹.