Markets Update March 2025 - Japan's monetary policy turnaround and its dangers for the global capital markets

Rarely before have the mood swings of market participants been more abrupt and the fluctuations on the global stock markets greater than in the past two months. At the low point of the sell-off in the wake of Donald Trump's so-called “Liberation Day”, when the US president announced comprehensive tariffs, the stock markets were extremely oversold: The Fear and Greed Index, which measures investor sentiment, signaled massive panic. Sentiment was the worst it had been for years. Only a short time later, the picture was completely reversed: an impressively rapid recovery even led to stock indices being clearly overbought for a time, with the Fear and Greed Index swinging into greed territory. The decisive factor was the realization that even Trump has an - economic - pain threshold and does not want to accept a complete economic collapse of the USA. Accordingly, he took steps to de-escalate trade policy. These triggered a rapid change in sentiment on the capital markets. Against this backdrop, the current consolidation phase is not surprising, as the rapid price rises need to be “digested”.

Investors should not ignore the risks for further market development. Firstly, the market stabilization could encourage Trump - as happened recently - to make new trade policy threats in order to influence the negotiations in his favour. In addition, the stock market turbulence in April has caused lasting uncertainty among US consumers and companies. And uncertainty is known to be poison for the economy, as it deters companies from investing and consumers from making major purchases. The consequences of this uncertainty are already reflected in numerous leading indicators. Experience shows that such weak demand is usually reflected in the “hard” economic data with a time lag. In addition, despite trade policy de-escalation, the effective US tariff rate has risen significantly and will result in a rise in domestic prices. Analysts assume that retailers will start to pass on the increased tariffs to consumers in the form of higher prices from mid-June. The USA is therefore facing a summer with clear stagflationary tendencies.

Worrying signals from Japan

What should have been a routine auction of 20-year Japanese government bonds caused a stir on the financial markets at the beginning of last week and at times led to a noticeable rise in yields on long-term bonds worldwide. What happened? Demand was surprisingly weak - it was the lowest participation in over a decade. As a result, significantly higher yields had to be offered in order to attract investors. Japan is currently in a dilemma: on the one hand, the country wants to escape the deflationary spiral and normalize its monetary policy. On the other hand, this is inevitably accompanied by a rise in market interest rates - which, in view of the country's enormous national debt, could cause interest expenditure to rise to an unsustainable level in the future and lead to considerable turbulence on the capital markets. The recent turmoil on the Japanese bond market makes it clear that the Bank of Japan's monetary policy is having increasingly undesirable side effects on the global financial markets. Professional investors should also keep a close eye on this issue.