Fed’s Aggressive Rate Hike Plans Jolt Policy in China and Japan

Asia’s two biggest central banks are having to grapple with the fallout from the Federal Reserve’s hawkish pivot.

The interest rates China’s biggest banks charge their best customers were held steady on Wednesday, even as the economy slows under the weight of rolling lockdowns to curb Covid-19. That may slow the pace of capital outflows after investors sold government bonds at a record pace over February and March as the People’s Bank of China eased monetary policy, while the Fed tightened.

In Japan, the central bank was forced to ramp up its bond purchases again on Wednesday as investors continue to test its ability to keep yields low as their American equivalents climb. The yen has suffered a historic run of losses as a result, prompting Bank of Japan Governor Haruhiko Kuroda this week to amp up his warnings on the yen’s sharp moves, indicating there may be a limit to how long the BOJ can remain this dovish.

“The Fed’s tightening is having a clear impact on China and Japan,” said Tuuli McCully, head of Asia-Pacific economics at Scotiabank. “It is making their monetary policy conduct much more complicated.”

That divergence is expected to deepen. Fed officials have signaled a relatively rapid pace of rate increases over the rest of the year to get their benchmark rate to what they deem to be a “neutral” level of 2.25-2.5%, or higher. They lifted their benchmark rate by a quarter-percentage point in March after keeping it near zero for the previous two years.