In Japan, interest rate increases herald a new era for financial markets

Japanese financial markets brace for rising interest rates, signaling a new era of economic change and investment opportunities.

Barely weeks after Japanese stocks broke three-decade highs, the country’s financial markets are hurtling toward another phenomenon not seen for the best part of a generation: rising interest rates.

Bankers are attending remedial classes on what to do when rates move and trading rooms are setting up for moribund derivative markets to spring to life — as they have begun to do.

Their pricing implies a matter of months at the most before the last bastion of a decades-long monetary policy experiment with negative short-term rates falls. An exit by the Bank of Japan is expected by June, with an even chance that rates will rise to zero next week.

Such a move, up 10 basis points, would be small, leaving traders to focus on broader signals: whether any change is implemented immediately, or later, and whether the BOJ winds down its enormous buying programme for assets ranging from Japanese government bonds to listed equity funds.

The symbolism is also heavy as Japan seeks to leave behind “lost” years marked by deflation and reawaken the fourth-biggest economy in the world as a destination for investment — a change already rippling through corporate Japan and global markets.

“I personally think this is going to be the beginning of a new era,” said Keita Matsumoto, head of financial institutions sales and solutions at Citigroup Global Markets Japan.

“It’s a fundamental shift in peoples’ mindset,” he said, one that may take five or 10 years’ adjustment as the economy changes.