The Bank of Japan raised interest rates by 25bp to 0.75%, and global financial conditions were suppressed

On December 19, the Bank of Japan raised interest rates by 25bp, raising the policy interest rate to 0.75%. Although the Bank of Japan has maintained restraint in raising interest rates, the reversal of yen liquidity and the Japanese bond market have suppressed global financial conditions.
China Merchants Bank’s research report pointed out that the Japanese yen carry trade may continue to reverse, causing long-term suppression of global asset liquidity. As of the end of 2024, approximately $9 trillion in positions will be based on the low-interest Japanese yen as a source of liquidity. In the future, this liquidity may shrink as the interest rate differential between the United States and Japan narrows.
Japanese debt risks may further intensify. In the short term, the Takaichi Sanae government approved a supplementary fiscal budget equivalent to 2.8% of nominal GDP. In the long term, Japan plans to increase defense spending to 3% of nominal GDP and permanently reduce the consumption tax.