DXY is fading away.
AUD is rising.
CNY helping.
Commodities took a breather.
EM yawn.
Junk better.
As yields eased.
Driving stocks.
The Japanese shock appears contained in a currency sense.
Japanese public debt is around $14tr, so you can imagine that any meaningful move in interest rates, especially a rapid one, is going to cause economic market dyspepsia.
This is double Japan’s GDP.
Yet the concern is exaggerated. Nearly all of Japan’s debt is owed domestically, so it is denominated in yen. Japan is therefore unlikely to be vulnerable to an external crisis in which yields rise while the currency falls, driving yields even higher.
The bad news is that inflation is more embedded now than it has been for 30 years, so the Bank of Japan is pushing up interest rates to counter it.
That means there is pressure on government borrowing costs and, in turn, the carry trade.
An unwind of the Japanese carry trade is an ongoing risk, and that means any Japanese shock may spill over into asset prices elsewhere as liquidity is withdrawn from the global financial system.
Liquidity-dependent assets like BTC, unprofitable tech, and junk debt are all examples. It will probably hold back the AUD at the margin as well.
But the BoJ is likely to be cautious, and the Japanese rate* is still low.
This Japanese yield-back-up will cause ripples, but it is unlikely to morph into a broader crisis.
