Global stocks and bonds came under pressure on Friday as investors assessed a broad shift toward tighter monetary policy among major central banks amid renewed inflation concerns.
The Bank of Japan’s decision to raise interest rates was the latest move in a week dominated by monetary policy. The increase was widely expected but failed to strengthen the yen, as markets focused on the possibility of further rate hikes and the widening policy gap between Japan and the United States.
The Japanese yen fell sharply against the dollar, with the greenback rising about 1% to 157.54 yen. The move put the yen on track for its weakest weekly performance against the dollar in two years.
The Bank of Japan raised its policy rate to 1.25%, its highest level in 31 years. Two members of the bank’s policy board opposed the increase.
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The yen had gained earlier in September on expectations that the BOJ could accelerate monetary tightening. It was up around 1.6% for the month before Friday’s decline.
BOJ Governor Kazuo Ueda said underlying inflation was approaching 2% and that the bank’s policy focus had shifted. Most policymakers, he added, still viewed monetary conditions as accommodative despite the latest increase.
Chris Scicluna, head of research at Daiwa Capital Markets Europe, said the Federal Reserve’s tightening could put additional downward pressure on the yen and increase Japan’s inflation risks.
He said another BOJ increase to 1.50% before the end of the year was possible if inflation and domestic demand remained resilient.
Central banks turn more hawkish
The BOJ decision followed a series of policy meetings that have highlighted growing concern among central banks about persistent inflation.
September has recorded the largest increase in average G10 interest rates since July 2023, with four central banks raising rates while others have signaled that additional tightening could be necessary.
The Federal Reserve raised interest rates on Wednesday for the first time in three years and adopted a more aggressive stance toward inflation.
The move has contributed to pressure on the yen and reinforced expectations that global borrowing costs could remain elevated for longer.
The Bank of England kept rates unchanged on Thursday but warned that a prolonged war in the Middle East could generate additional inflationary pressure and potentially require tighter policy.
The European Central Bank has also signaled the possibility of further tightening, while Australia’s central bank said some of the inflation risks it had previously identified were beginning to materialize.
Middle East war keeps inflation risks elevated
The shift in monetary policy is taking place against the backdrop of a prolonged war in the Middle East.
The conflict has pushed oil prices above $100 a barrel, increasing concerns that higher energy costs could feed into broader inflation and complicate efforts by central banks to bring price growth under control.
Brent crude fell as much as 2.8% on Friday to around $101.92 a barrel after reports that China had asked Tehran to help restrain the Houthis following their recent military offensive.
Expectations that Gulf oil exporters could find alternative routes to transport crude have also eased some supply concerns.
Brent was on course for a weekly decline of around 2%, although physical market prices remained considerably higher, at around $120 a barrel.
For central banks, however, the decline in futures prices does not eliminate the broader inflation threat. A prolonged disruption to energy supplies could keep consumer prices elevated even if headline oil prices temporarily retreat.
Bond markets remain under pressure
Bond markets have also reflected the changing interest rate outlook.
U.S. Treasury yields surged during the week, with the benchmark 10 year yield briefly moving above 5%, its highest level since 2007. It was last around 4.93% on Friday.
Euro zone and British government bond yields have also reached multi year highs in recent days, although movements were more limited on Friday.
European stocks fell around 0.3%, while U.S. stock futures rose between 0.3% and 0.6%, supported by technology shares.
The market response reflects a difficult environment for investors. Falling oil prices have offered some relief, but the prospect of prolonged inflation and higher interest rates continues to weigh on bonds and risk assets.
The key question for markets is now whether central banks can contain inflation without putting excessive pressure on economic growth. With energy prices still elevated and geopolitical risks unresolved, policymakers face a narrower path between controlling inflation an
With information from Reuters.
