KUALA LUMPUR: The Bank of Japan’s (BOJ) ongoing policy normalisation is likely to have a greater impact on Asian financial markets than the European Central Bank’s (ECB) higher-for-longer interest rate stance.
This comes as investors reassess the implications of Japan’s shift away from decades of ultra-loose monetary policy, an economist said.
IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan said the BOJ’s policy shift represents a potential regime change rather than a conventional monetary cycle.
"For almost three decades, global investors operated under the assumption that Japan would remain an anchor of ultra-low interest rates and abundant liquidity. That assumption is increasingly being challenged.
"What makes the BOJ important is not the absolute level of rates, which remain low by international standards, but the signal that Japan may be exiting an era of extraordinary monetary accommodation,” he told Bernama.
Shift In Capital Flows
Mohd Sedek said while the ECB’s restrictive stance remains important, it largely reflects a familiar inflation-versus-growth trade-off that markets have been adjusting to over the past several years.
"The ECB’s higher-for-longer stance is important, but it remains a familiar story. Markets have spent the past three years adapting to elevated inflation, restrictive policy rates and tighter financial conditions.
"The debate is largely about timing and magnitude,” he added.
By contrast, he said the more important question for investors is how Japan’s policy normalisation could affect global capital flows after decades of ultra-low interest rates.
"The key issue is not whether Japanese money comes home aggressively, but whether one of the world’s most important sources of marginal demand for foreign assets becomes less active,” he said.
Mohd Sedek said that even a modest reduction in outbound allocations could have meaningful implications, as Japanese investors remain among the largest holders of overseas financial assets globally.
Malaysia Impact
On the Malaysian front, Mohd Sedek said the most visible impact would likely be felt in the ringgit and government bond market rather than equities.
"The reason is that Malaysia is relatively insulated from direct Japanese portfolio reallocations compared with some North Asian markets, although it remains highly exposed to shifts in global risk appetite and cross-border fixed-income flows.
"If BOJ normalisation results in higher domestic Japanese yields, the first-order effect would likely be a moderation in Japanese demand for foreign bonds globally,” he said.
While Japanese ownership of Malaysian Government Securities (MGS) is not dominant, Malaysia's bond market remains heavily integrated into global fixed-income portfolios, he noted.
"Any reduction in global duration demand could place upward pressure on local bond yields,” he said.
Mohd Sedek said historically, periods of yen appreciation tend to coincide with broader deleveraging of carry trades and tighter global liquidity conditions.
"In such an environment, investors often reduce exposure to emerging-market currencies, including the ringgit.
"Therefore, the ringgit could experience greater volatility even if Malaysia is not the direct target of Japanese capital repatriation,” he said.
Nevertheless, he does not expect a sustained structural depreciation of the ringgit, citing that Malaysia’s improving external position, persistent current-account surplus and ongoing foreign direct investment inflows provide important buffers.
In contrast, he added that the equity market is likely to be the least affected among the three asset classes, as domestic earnings, commodity prices, technology exports and local institutional participation remain key drivers of equity market performance.
"Unless BOJ tightening triggers a broader global risk-off episode, the transmission to Bursa Malaysia should be relatively limited,” he said.
Fed Remains Key Market Driver
Meanwhile, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the United States (US) Federal Reserve (Fed) remains the dominant driver of global bond yields and financial market sentiment.
"The US Fed remains the driving force for global bond yields and currently, the focus is on Federal Open Market Committee (FOMC) meeting outcome on its interest rate decision on June 16 and 17,” he said.
Mohd Afzanizam said investors are closely watching the FOMC’s latest economic projections for clues on the future direction of US monetary policy.
"The market is looking for what would be the Fed’s next move based on its upcoming quarterly forecast,” he said.
He noted that the latest US consumer price index reading of 4.2 per cent in May, the highest in three years, could reinforce expectations of a more hawkish monetary policy stance.
"In short, it is still the Fed that will drive the market,” he said.
On Malaysia, Mohd Afzanizam said capital flows continue to be influenced largely by global risk appetite, which is currently shaped by developments in West Asia, oil prices, inflation and central bank responses.
He added that while foreign investors were net sellers in both the equity and bond markets in May, liquidity remains ample within the broader financial system.
"However, we believe the money is still in the system, especially in the money market instruments such as the Treasury bills,” he said.
It was reported that the BOJ recently raised its benchmark interest rate by 25 basis points to one per cent, the highest level since 1995, and signalled that further policy normalisation may lie ahead amid resilient inflation and wage growth.
Meanwhile, the ECB raised its three key interest rates by 25 basis points effective June 17, bringing the deposit facility rate to 2.25 per cent, the main refinancing operations rate to 2.40 per cent and the marginal lending facility rate to 2.65 per cent. - Bernama
