Why Japan’s markets flipped the usual script after central bank rate hike - CNBC

Japan's markets have repeatedly defied the textbook reaction to tighter monetary policy. When the Bank of Japan raised interest rates, conventional logic would suggest a stronger yen and pressure on equities. Instead, the currency has often weakened while stocks have held up or advanced — a pattern that has puzzled observers accustomed to how other central banks' tightening cycles play out.

The explanation lies partly in carry trades. Years of ultra-low Japanese rates made the yen a funding currency, and rate increases that look small by global standards may not be enough to reverse that positioning, especially when yield differentials with other economies remain wide. Domestic investors' overseas allocations and corporate governance reforms have also supported Japanese equities independently of rate moves.

For market watchers, the lesson is that Japan's policy normalization is not simply a mirror image of Federal Reserve or European Central Bank tightening. The pace of further hikes, the BOJ's guidance on bond purchases, and the yen's level relative to rate differentials are the key variables to monitor.