BlackRock said faster rate hikes by the Bank of Japan could prompt Japanese investors to bring money home in search of higher returns, pushing up global bond yields. According to Sina Finance, BlackRock strategist Wei Li and others wrote in a report that the spillover effects are real and that bond markets risk forming a feedback loop.
The report said Japan currently offers attractive risk-free yields, and that Japanese investors have spent decades sending money overseas to seek income because domestic yields were kept at ultra-low levels. As rates rise, some of that capital may return to the Japanese market.
BlackRock also said Japan's economic conditions call for tighter monetary policy because inflation remains persistent, but rising government spending and debt of more than twice GDP make higher rates more costly. It added that overly loose monetary policy has put pressure on the yen.
If the yen weakens and Japanese authorities decide to sell overseas assets, including U.S. Treasuries, to support the currency, U.S. Treasury yields could face further upward pressure. Higher U.S. rates could weaken the yen and force the Bank of Japan to raise rates faster, while higher Japanese rates could draw more funds back home and reduce demand for U.S. Treasuries, lifting U.S. borrowing costs.