The rate hike signaled by Bank of Japan (BOJ) in its December meeting is likely to result in increased yields on all bonds around the world and also result in lower value of US Dollar and therefore more money in less secure assets such as shares of stock and cryptocurrencies.
What happened
• The Governor of the BOJ has indicated that the central bank is very seriously considering raising rates in December 2018, after having had several years of an exceptionally low rate of interest.
• There was an immediate spike in yields in Japan and yields across the globe also increased as a direct result.
• As a result of this announcement, equities across the globe experienced a sudden increase in selling pressure, US Dollar decreased in value relative to Japanese Yen, and subsequently, demand for gold and all other precious metals dramatically increased.
Why is this important
• This is a sign of the end of the time period of ultra-low interest rates in Japan and could have a significant ripple effect on capital flows across the globe.
• As a result, Japanese yields are expected to entice investors who previously invested in assets with low yields to invest in assets with higher returns. Therefore, pressure has increased on equities and other riskier assets.
• Therefore, the impact of increased rates on Forex, crypto, and commodity traders is that increased volatility will likely occur, and the assessment of their current trading strategies will have to be reassessed due to the fact that funds will likely be moved around among several different asset classes.
WikiLix Insights
A potential increase in the BOJ rate is an important indicator that can signal change around the world. A nation that has maintained extremely low interest rates for a prolonged period of time can have a huge impact on international financial markets due to changes in capital flows, asset values, and therefore, risk and opportunity. Therefore, as the BOJ and other central banks change their monetary policy, traders and investors should monitor these changes closely especially with respect to their potential currency, bond, and cryptocurrency exposure.
