Gao Zhanjun: Who Are the Winners in Central Bank's Interest Rate Game? (AI Translation)

【周刊提前读】高占军：谁是央行利率博弈赢家？

The financial markets worldwide have recently experienced severe fluctuations, resulting in the loss of $6.5 trillion in stock market wealth within a few days [para. 1]. This period of turbulence has seen dramatic movement in exchange rates, bond yields dropping sharply, and increased investor movement towards safe havens [para. 1]. Japan was notably affected, where major stock indices dropped 20% within the first three trading days of August, a historical low resulting in a $1.1 trillion loss in market value. On August 5, Japan's stock market recorded a 12% drop, the largest since October 1987, leading to 10 circuit breakers on stock index futures being triggered. Concurrently, the yen surged by 8% over four days, and the yield on 10-year government bonds plummeted from 1.07% to 0.78% [para. 2].

Other Asian markets also suffered. On August 5, Taiwan's weighted index fell by 8.4%, the biggest decline since 1967, and South Korea's KOSPI index fell by 8.8%, the most significant drop since 2008. In the United States, the NASDAQ index fell by 8.13% over four days, and yields on 2-year and 10-year Treasury notes dropped to 3.65% and 3.67%, respectively, briefly reversing the yield curve inversion. The UK, however, remained relatively steadier, with the FTSE 100 index dropping only 4.36% over three days [para. 3].

This turbulence has triggered a focus on central banks, with significant events pointing towards their policies. The Bank of Japan was the first to hold a meeting on July 31, raising interest rates by 15 basis points and reducing its government bond purchases. This move was uncharacteristically decisive but triggered a stock market crash and excessive yen appreciation, harming Japan’s economy and contributing to global market turmoil [para. 4][para. 5].

On the same day, the Federal Reserve concluded its two-day meeting and decided to keep the rates unchanged, while hinting at a potential rate cut in September. This move was more expected, but a spike in unemployment rate from 4.1% to 4.3% in July alarmed the markets, signaling an imminent U.S. recession. The unemployment rate indicated recession expectations, coupling with disappointing non-farm employment growth, average hourly wages below expectations, negative excess savings, and pessimistic earnings forecasts from tech companies [para. 6][para. 7].

The combined effects of Japan’s rate hike, the Federal Reserve’s delay in easing policies, Middle East conflicts, and U.S. election uncertainties led to significant sales of risk assets and unwinding of yen carry trades, triggering a financial crisis [para. 8]. Meanwhile, the Bank of England's cautious decision to cut rates on August 1, with a narrow 5-4 vote, allowed the UK to navigate the turmoil relatively unscathed, thus enhancing its credibility [para. 9]. This financial turmoil highlights how central banks' monetary policies impact the global economy, with nuanced competition among them. The Bank of Japan's hasty rate increase, the Fed's delayed response, and the Bank of England's timely action demonstrate their pivotal roles in market stability [para. 9].