China Merchants Bank released a research report stating that on December 19, the Bank of Japan raised interest rates by 25 basis points, raising the policy rate to 0.75%. Although the Bank of Japan is highly likely to remain very cautious in its pace of rate hikes, the reversal of yen liquidity and the Japanese bond market will continue to suppress global financial conditions.

First, the yen carry trade may experience a sustained reversal, exerting long-term pressure on global asset liquidity. As of the end of 2024, there are still about $9 trillion positions using low-interest yen as a source of liquidity, and this portion of liquidity may steadily contract as the US-Japan interest rate differential narrows. Second, Japanese bond risks may further ferment. In the short term, the Suga government has approved a supplementary fiscal budget equivalent to 2.8% of nominal GDP. In the long term, Japan plans to increase defense spending to 3% of nominal GDP and permanently reduce the consumption tax. The Japanese government's untimely fiscal expansion stance may trigger greater market concerns, and medium- to long-term Japanese bond yields may rise sharply, with the curve steepening at an accelerated pace.