The Bank of Japan shifted gears on Tuesday, raising interest rates from -0.1 percent to a range of 0 to 0.1 percent. This adjustment was largely caused by Japan's economy outperforming expectations.
In the October-December period, Japan's revised GDP increased by 0.4% on an annualized basis compared to the previous quarter, reversing the prior forecast of a 0.4% fall.
Meanwhile, the Japanese stock market experienced a bull run this month, surpassing 40,000 for the first time in history. However, economists anticipate that this move will have a less significant influence on Indian markets.
What does this turnaround imply for India?
The BSE Sensex fell 736.37 points, or 1.01 percent, to settle at 72,012.05 on Tuesday. On the other hand, the Nifty declined by 238.25 points, or 1.08 percent, to 21,817.45. High selling pressure dominated the market. While India's benchmark indices fell following the hike, the broader outlook had a greater impact.
"Investors remained on edge as key central Banks globally are scheduled for rates meeting. We expect the market to remain in consolidation mode as cautiousness persists with the commencement US Fed meeting," said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd.
According to reports, India's stock market has remained Japan's favorite emerging stock market, with total assets of India-focused investment trusts in Japan increasing by 11% in January. Bloomberg reported that this growth totaled JPY237 billion ($1.6 billion). Samir Bahl, CEO of Investment Banking at Anand Rathi Advisors, argues that while Japanese retail inflows into Indian markets have increased, they are still very low and would have no substantial impact. “The Interest rate hike is more likely to impact global bond market pricing & capital flows," he added.
Analysts expect Japanese offshore investments to remain stable as the central bank maintains its supportive posture. The stabilization of inflation levels supports the end of negative interest rates without implying a retreat of assistance.
Another factor that has market participants on edge is the 'carry trade' component. It entails using interest rate differentials to benefit by investing in two distinct financial instruments. Typically employed in forex trading, investors can borrow cash in a currency with low interest rates and invest it in other financial assets that provide better returns.
According to a Deutsche Bank analysis published in November, tightening monetary policy in Japan might lead to the end of the huge carry trade, which is worth more than $20 trillion globally.
Meanwhile, Japan's bond market has been performing well, with borrowers issuing a record $112 billion in yen-denominated bonds in the fiscal year ended March 31. It is projected that the overall quantity of bonds issued will remain high, ranging between 15.5 trillion JPY and 17.6 trillion JPY.
"The BoJ will persist with its purchases of Japanese Government Bonds, which will maintain a wide yield spread between Japanese bonds and those of other major economies," said Hitesh Jain Strategist Yes Securities India Ltd.
Similarly, large Asian markets have greater yields. This logic allays fears that a large move in BoJ policy would have far-reaching global consequences, given Japan's $4.5 trillion holdings in foreign securities, he noted.
