China’s property-market woes are front and center among macroeconomic worries, but Japan remains a potential powder keg when it comes to volatility in global markets. Right now, attention should be paid to a weakening Japanese yen that might soon tempt the nation’s authorities to step in to stop the slide, market watchers said.
That problem would be another jump in global government bond yields, which can sap investor appetite for stocks other assets perceived as more risky. Investors got a taste of that in late July, when a tweak to the BOJ’s yield-curve control program sparked a kneejerk spike higher in U.S. Treasury yields and threw cold water on a U.S. stock-market rally.
A key issue is that BOJ bond market interventions, and a negative policy rate, limit the extent to which long-term can rise, Gallo said, while at the same time, Japan’s fiscal position suggests that longer-term borrowing costs should be considerably higher. The yen also popped higher after the tweak last month to yield-curve control, but the bounce was short-lived. After all, such “tinkering around the edges” wasn’t expected to support the yen, with traders paying much more attention to still negative short-term interest rates, Gallo noted.