This article reviews the market reaction after the central banks of Japan and the United States each raised rates by 0.25%, movements in long-term yields, and the factors behind yen depreciation. The focus is on key points and the outlook ahead of the Japan-U.S. meetings at the end of October.
The U.S. Federal Reserve raised its policy rate by 0.25% on 16 September, followed by a 0.25% increase by the Bank of Japan on the same day. The Fed's new policy rate was in the 4.0% range, while the Bank of Japan's rate was raised to approximately 1.25%. Although the market had priced in the hikes, the response included yen depreciation and higher share prices, with the Nikkei rising into the 70,000 range before turning lower the following week.
The reasons the yen continued to weaken after the rate hikes included the Japan-U.S. interest-rate differential, higher oil prices and changes in funding demand driven by AI demand, which also affected long-term yields. The U.S. 10-year Treasury yield fell temporarily to 4.94% before returning to the 5% range. The dollar-yen rate continued rising into the low ¥158 range, cited as a factor behind continued yen depreciation.
Long-term yields are not determined solely by Federal Reserve rate hikes, with high oil prices, public-sector borrowing conditions and demand for AI investment also contributing. U.S. equities remained supported by expectations for earnings growth while long-term yields stayed in the 5% range, and the S&P 500 and other indexes showed signs of recovery, although they could move again depending on the results of the meetings at the end of October.
The next focus will be the Bank of Japan's release of its Outlook for Economic Activity and Prices on 29–30 October and the Japan-U.S. FOMC outcomes scheduled for that week. Attention is focused on how movements in dollar-yen, the Bank of Japan's rate-hike stance indicated in the outlook report, and the implications of the FOMC dot plot will be reflected in markets after the meetings.
In summary, the market responded with yen depreciation and higher share prices despite rate hikes in both Japan and the United States, while long-term yields showed complex movements. Attention is now focused on related indicators and statements ahead of the meetings at the end of October.