The 'Black Monday' in early August this year may still be fresh in many investors' memories. On August 5th, due to the Bank of Japan's interest rate hike in July triggering a yen carry trade unwinding, the yen rebound caused market panic, leading to significant fluctuations in global stock markets, currency markets, and bond markets, with the Japanese stock market setting a staggering record of a 12% single-day plunge.

Recently, Arif Husain, the head of fixed income at PIMCO with 30 years of investment experience, said that he had issued a warning about the risks of a rate hike in Japan as early as last year. He warned that investors have only 'just seen the initial stage of this disaster, and there will be more market volatility in the future.

'Black Monday' just the beginning?

In his report, Husain wrote that the 'Black Monday' on August 5th, on the surface, was caused by the Bank of Japan sending a hawkish signal, coupled with concerns about the slowdown in the U.S. economy, triggering the unwinding of the yen carry trade and pushing up the yen exchange rate.

However, investors may have overlooked the deeper root cause of the sharp decline in global stock, currency and bond markets: as Japanese interest rates continue to rise, a large amount of Japanese funds invested overseas may flow back to Japan.

"Treating the yen carry trade as a scapegoat ignores a larger, deeper trend that is beginning," said Husain. "The impact of the Bank of Japan tightening its monetary policy and its impact on global capital flows is not simple, and it will have a huge impact in the coming years."

The flow of Japanese funds back to Japan will have an impact on global markets.

Although it has been nearly a month since the "Black Monday", the exchange rate of the Japanese yen against the US dollar is now stable in the range of around 140 yen, but market volatility is still rising.

Hussein expects that the interest rate cuts that the Federal Reserve has basically determined in September and the Bank of Japan's expected further tightening of policy may soon shake the market again.

Hussein is inclined to increase its holdings of Japanese government bonds because he believes that as yields rise, capital may flow back to Japan. He also prefers to reduce holdings of US Treasury bonds. He believes that as Japanese institutional funds move back to the country from the US, US Treasury bonds may face pressure.

$Japan 10-Year Treasury Notes Yield (JP10Y.BD)$

Hussein wrote: "To some extent, higher Japanese yields may attract the country's large life insurance and pension fund investors to withdraw from other government bonds and reinvest in Japanese government bonds... In fact, this will readjust the demand of the global market."

Editor/Rocky