Bank of Japan's rate hike aftermath: $9 trillion in carry trade positions may shrink, global liquidity faces long-term suppression

【Chain Wen】The Bank of Japan has taken action again. On December 19, it raised interest rates by 25 basis points, pushing the policy rate to 0.75%. Although this rate hike is not large in magnitude, the chain reaction behind it is the real focus.

First, let’s look at yen carry trades. By the end of 2024, there are still about 9 trillion USD of low-interest yen positions in the global financial markets, a result of years of carry trade accumulation. As the Japan-US interest rate differential gradually narrows, this massive liquidity source is slowly drying up. When these positions are forced to be closed, global asset liquidity will face long-term suppression—this is a test for risk assets and emerging markets.

Next, the hidden risks of Japanese bonds. The Japanese government recently approved an additional fiscal budget equivalent to 2.8% of nominal GDP, and also plans to raise defense spending to 3% of GDP, along with a permanent exemption from consumption tax. While this combination is politically attractive, from a market perspective, it is adding fuel to the fire. Japan’s debt is already so high, yet it continues fiscal expansion—how will the market react? In the medium to long term, Japanese bond yields are likely to rise steeply, with the yield curve accelerating its steepening.

In simple terms, this round of rate hikes by the Bank of Japan will not only impact Japan itself but will also exert ongoing pressure on the global financial markets through liquidity and bond market channels.