BOJ tightening may send shock waves to global markets

The Bank of Japan's policy tightening may send shock waves through the financial arena, as the latest bastion of extremely low interest rates is engulfed in policy tightening by the Bank of Japan. Lift-off could be at hand, he said, according to T. Rowe Price.

Japan's monetary policy could be the San Andreas fault of global finance, said Arif Husain, head of international fixed income and chief investment officer at the $1.3 trillion fund. In my opinion, I know the BOJ is aware of the effect it could have on global markets, but it s a real and present danger. I certainly think it s something that should be on our radar as investors. Husain joins BlackRock Inc. and the European Central Bank in warning that the BOJ's policy normalization may send a wave of Japanese cash flowing out of global markets toward home. Japan's investors have splurged more than $3 trillion on offshore investments over the past few years, which was bludgeoned by negative rates. The Great Recession may be over, with Japanese investors selling a record amount of European debt last year, according to data compiled by Bloomberg.

A $3 Trillion threat to global financial markets is looming in Japan.

Husain said the last anchor of quantitative easing may be about to give way and recent history gives his warning credence. Japan's central bank relaxed its grip on its tightly controlled 10-year bond yield last December by a fraction last December - a move that jolted everything from Treasuries to the Australian dollar.

This week, global bonds remained under pressure from surprise rate hikes by the Bank of Canada and the Reserve Bank of Australia, which may refuel pressure on the BOJ to tighten. But signs from the futures market suggest foreign investors are not prepared for any significant BOJ shift.

A Bloomberg survey shows that BOJ watchers have pushed back their forecasts for the timing of policy adjustments to July, and only a third of respondents expect it. In response to Ueda's repeated call for continue monetary stimulus, the governor has repeatedly signaled the need for continued monetary stimulus.

If the BOJ lifts its yield curve controls, it could end up being a lot more important for markets than whether the Fed hikes or cuts rates at its next meeting, Husain said. A surge of global funds from Asia could have a significant impact on markets outside Japan, leading to an exodus of global funds. None Payrolls, prices, productivity and profits hold the answer to the puzzling US economy.