ECB: near the end, barring emergencies.
Last week, the European Central Bank (ECB) lowered its main interest rate from 2.25% to 2%, and its President, Christine Lagarde, made it clear that the monetary easing cycle was nearing its end. This statement comes as no surprise given the current economic environment. Despite being modest (estimated around 1% in 2025), European growth remains resilient amid uncertainty surrounding tariffs imposed by the United States. Meanwhile, inflation continues to slow across the eurozone and is approaching the ECB’s much-anticipated 2% target. One final rate cut is expected to be announced in the second half of the year. The ECB will then adopt a wait-and-see approach, assessing the potential impact of global trade tensions on economic activity in the Old Continent. The situation remains comfortable for Ms. Lagarde, as she still retains a safety cushion to act in the event of an economic emergency. The ECB’s announcements were largely anticipated, and the repercussions on both the European bond market and the foreign exchange market were negligible, with 10-year yields and the euro remaining particularly stable.
Japanese market: resilience amid long-term rate volatility
The sharp correction in long-term Japanese government bonds that occurred in May shook markets and raised investor concerns. Even without the potential impact of a US-driven “Big Beautiful Bill,” the yield on 30-year Japanese government bonds soared past 3.2%, a historic high, compared to just 0.7% at the start of 2022. While long-term rate volatility is also present in the US, Japan’s context comes with unique characteristics.
First and foremost, more than half of these bonds are held by the Bank of Japan (BoJ), a direct legacy of its yield curve control policy, which led it to massively purchase its own debt securities. Since March 2024, however, the BoJ has started tapering these purchases, committing to reduce its monthly acquisitions from about 5.7 trillion yen in 2024 to under 3 trillion yen by early 2026. This gradual but resolute tightening has dried up demand, pushing yields higher. Neither banks nor insurers have filled the gap left behind. The BoJ is now striving to calm markets through targeted adjustments aimed at rebalancing supply and demand.
But should we fear that this rate volatility could spill over into Japanese equities, particularly the financial sector, including banks and insurers? Compared to their US counterparts, Japanese financial institutions hold a significantly smaller share of long-term government bonds. The direct impact on insurers’ portfolios should also remain limited, as most of these holdings are classified as “held to maturity” under accounting standards and are thus immune to market fluctuations.
Moreover, the stock market seems to be brushing off these concerns: indices have recouped losses incurred since the protectionist announcements from the Trump administration in early April, with the banking sector index significantly outperforming the Topix since the start of the year. Banks continue to benefit from the gradual normalization of rates, even though a further hike in the BoJ’s policy rate appears unlikely before October, due to ongoing uncertainty surrounding economic outlooks, particularly trade tensions.
Nonetheless, several factors warrant close monitoring: another surge in long-term yields, the risk of a sharp yen appreciation, and persistent uncertainty around tariffs with the United States. Despite recent bond market volatility, we are not overly concerned and maintain a neutral stance on Japan. Earnings momentum remains attractive, albeit temporarily constrained by the strong yen, which weighs on Japanese exporters. As long as yields do not climb further, which recent BoJ measures are precisely designed to prevent, the risk of a major correction remains contained.
This week’s figure: 235’000
In the United States, jobless claims have reached their highest level since October 2024. Since the beginning of the year, the labour market has shown a gradual deterioration, which is likely to prompt the Federal Reserve to resume easing its monetary policy.
Author
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Ed Yau is an Asian market specialist with 20 years of experience in managing equity portfolios. He previously worked as Head of Research in several Hedge Funds in Switzerland and Singapore. An HES engineer by training, he also holds a degree from the University of Geneva and an MBA from the University of Chicago. He joined the Bank in 2018 and became a member of the investment committee, in charge of managing several thematic certificates and equity funds, as well as setting up ESG investments.
