Japan year-end deadlines trigger market turbulence

If we think about what benefits bitcoins bring to the global economy, we may realize that the biggest one is how the cryptocoin has helped put a lid on global inflation.

As central banks across the world unleashed quantitative easing monetary policies, a great amount of capital flowed into new-economy stocks and cryptocurrencies and because a lot of money was locked in these financial assets, it could not flow into the economy.

Commodities became popular again at start of the year, so the global hyperinflation that had been expected by the market due to the quantitative easing did not happen.

However, with the change of attitude in financial markets, shouldn't we pay a bit more attention to global inflation?

Before we talk about the outlook for investors, let's discuss why global financial markets saw such big fluctuations in March.

One of the reasons was because the US 10-year debt interest rate rose to a level of 1.7 percent or higher.

This made investors worry that global interest rates will be affected and raised within this year. Although the US Federal Reserve and other major central banks have constantly pointed out that they do not intend to raise rates this year, the cost of enterprises' bond issues will inevitably be affected, so it is very normal that there are corrections in the stock markets.

But who is selling US Treasuries?

Morgan Stanley chief interest rate strategist Matthew Hornbach found that the selling of Treasury bonds was not because investors were worried about inflation or that interest rates will go higher in the future.

Rather, many investors sold their Treasuries on the Tokyo Stock Exchange at the start of the year. According to data, 85 percent of the decline of US Treasury bonds this year happened after trading hours in the United States. So, what made American Treasury bonds fall with Japanese orders and why was there such selling pressure on US Treasuries during the Japanese trading session?

One of the reasons is that most Japanese companies end their financial year in March, so a lot of funds need to be prepared for closing day.

Of course, with interest rates being zero on almost all the world's major currencies now, the amount of carry trades should have fallen, so the year-end closing in Japan should have less of an impact on financial markets.

However, because of the impact brought by the pandemic last year all over the world, central banks launched many QE policies, making investors more sensitive about risks. Therefore, the amount of carry trades also increased but in a different form.

In the past, interest rates on the yen were at zero for a long time, while other currencies still offered at least 1 percent in interest. So investors borrowed in yen and sold it to buy other currencies such as US dollars, to earn spreads.

At the same time, investors would use the relevant currency to buy stocks or commodities investment products to earn more profits.

But at present, investors need to borrow in yen and sell them to buy US dollars in order to purchase US Treasuries to earn spreads, and then use the US debt as collateral to buy other investment products, such as new-economy stocks.

So, as annual closing day in Japan draws closer, the money will be "deleveraged" to sell new-economy stocks to cash-out and redeem Treasuries to sell them for US dollars at the same time and then change the US dollars to yen to settle the yen loans.

This is why the financial markets have seen such large fluctuations across February and March.

So what will happen to global financial markets after the end of the Japanese accounting year, and how will it affect the global economy? Will bitcoin continue to be a cult hit? We shall talk about all this after the Easter break.

Andrew Wong is chairman and CEO of Anli Securities