Japan is on the verge of a historic economic shift. For years, the country has maintained near-zero interest rates to fight stagnation, but with inflation now consistently holding above the central bank’s 2% target, that era is ending. On Tuesday, the Nikkei 225 gained 0.5% after Bank of Japan Governor Kazuo Ueda hinted at an imminent rate hike. This prospect lifted financial stocks, which typically profit from higher interest rates, driving the index to 49,534.36.
The ripple effects of Japan’s potential policy change were felt globally. Yields on longer-term Treasury bonds rose, contributing to a pullback in U.S. markets. Higher yields in the bond market often drain capital from equities, as investors opt for safer returns. This dynamic broke the S&P 500’s five-day winning streak and pushed the Dow Jones down by 0.9% on Monday.
Despite the wobble in the U.S., other Asian markets joined Japan in the green. Australia’s S&P/ASX 200 added 0.2%, and Taiwan’s benchmark climbed 1%. The resilience in Asia suggests that investors are pricing in a recovery in the semiconductor cycle, evidenced by strong gains in South Korean chip giants Samsung and SK Hynix, rather than panicking over U.S. market movements.
However, not all sectors are celebrating. U.S. manufacturing remains a sore spot, with survey data showing that companies are freezing hiring amidst supply chain chaos. “Conditions are more trying than during the coronavirus pandemic,” one manufacturer reported. This weakness in the industrial sector is a key reason why markets are overwhelmingly expecting the Federal Reserve to cut interest rates next week to prevent a broader economic slowdown.
In the commodities market, prices remained muted. U.S. benchmark crude oil rose marginally to $59.34 per barrel, while Brent crude slipped slightly. As the Bank of Japan prepares to tighten its belt while the U.S. Federal Reserve looks to loosen yours, this divergence in monetary policy is set to create unique trading opportunities—and risks—in the coming weeks.