While investors keenly monitor the Fed, the Bank of Japan's actions can send shockwaves through global markets
View of the headquarters of the Bank of Japan in Tokyo.
Image: Stanislav Kogiku/SOPA Images/LightRocket via Getty Images
In the modern world, where investors and traders are focused on the Fed, the Bank of Japan's (BOJ) influence is often overlooked. However, even a 25-basis point hike by the BOJ caused turmoil in global markets. If the BOJ were to adopt aggressive rate hikes like the Fed, the resulting chaos could dwarf the financial crises of 2008 and 1929.
By providing zero-cost capital, the BOJ has inadvertently fuelled worldwide free capital flow, known as the Yen Carry trade, where investors borrowed in yen at zero cost and invested globally. This inflated asset prices worldwide for over two decades. Post-December 2008, the US Fed and other central banks adopted similar policies, causing asset prices to soar—from stocks to Bitcoin.
This era of free capital and global profits faced complications with the Fed's rate hikes since March 2022.
[This article has been reproduced with permission from SP Jain Institute of Management & Research, Mumbai. Views expressed by authors are personal.]