The Bank of Japan raised fears about a repeat of the yen carry trade unwind to start the week, reviving concerns about the country's central bank tightening monetary policy.
So why exactly is a central bank on the other side of the planet spooking US investors?
It is helpful to recall the moment in August 2024, when volatility suddenly surged after Japanese government bond yields spiked. This created a tough situation for investors who had put on the "yen carry trade," which involves borrowing yen at low interest rates and then converting it into dollars to invest in US assets, such as stocks. When rates rise in Japan, investors can be forced to unwind leveraged bets to cover higher borrowing costs.
Investors on Monday were fearing the Bank of Japan's policy maneuvering could cause another spasm of volatility after governor Kazuo Ueda said the central bank would consider raising interest rates at its upcoming meeting, delivering more hawkish views than markets had been expecting.
Markets are pricing in an 80% chance that the Bank of Japan, which has kept borrowing costs low for decades, will continue to raise rates at its December policy meeting.
The reaction in both stocks and bonds was negative.
Japan's 2-year government bond yield climbed three basis points to trade 1.02% in the early morning, its highest level since 2008.
The nation's 10-year Treasury note also ticked up by six basis points to around 1.8%, its highest level in 17 years.
Risk assets in the US, meanwhile, were down broadly.
Major indexes tumbled early Monday but were recovering some of their losses by about midday.
Here's where major US indexes stood around 1 p.m. on Monday:
- S&P 500: 6,834.91, down 0.21%
- Dow Jones Industrial Average: 47,494.09, down 0.47% (-223 points)
- Nasdaq 100: 25,409.68, down 0.1%
Meanwhile, there wasn't much reprieve to be found in US bonds, which also saw yields spike. The 10-year US Treasury yield climbed seven basis points to 4.09% and the 2-year Treasury yield rose four basis points to 3.5%.
The fresh pivot to risk-off hit crypto the hardest, with bitcoin down as much as 8% and still reeling from its sharp descent into a bear market since peaking in early October.
Bitcoin traded as low as $84,000, pulling the token down around 32% from its peak in early October.
Ethereum also dropped 8.9% on Monday, marking a 41.8% decline over the same timeframe.
Japan's central bank appears to be "driving the sentiment shift" in markets this week, Thierry Wizman, the global FX and rates strategist at Macquarie Group, said on Monday.
"Traders are having second thoughts, it seems, about having run stocks up as much as they did last week," Wizman wrote in a client note on Monday. Stocks enjoyed a relatively strong holiday-shortened week.
"Financial markets are kicking off December in a turbulent fashion as policy tightening hints from the Bank of Japan nudge global rates higher and dull the dollar's appeal," Karl Schamotta, the chief market strategist at Corpay, wrote in a note, pointing to how the yen gained against the US dollar.
"Traders are waking up this Monday after a quiet Thanksgiving to an overwhelming sense of déjà vu, as a surge in the Japanese yen is once again playing havoc with markets," Nic Puckrin, an investment analyst at The Coin Bureau, wrote in a note. "The Japanese yen carry trade is once again beginning to unwind," he added.
