Global financial markets experienced significant crosscurrents on Monday, driven by policy developments in Asia. The U.S. dollar faced downward pressure following reports that Chinese financial regulators have instructed domestic banks to curtail their exposure to U.S. government debt, citing concerns over concentration risk and market volatility. Concurrently, the yield on the benchmark 10-year U.S. Treasury note climbed three basis points to 4.23%.
Japan's Political Shift Fuels Market Optimism
In Tokyo, investor sentiment soared after Prime Minister Sanae Takaichi secured a decisive electoral victory, paving the way for promised fiscal stimulus. The Nikkei 225 index jumped 3.9% to close at a historic peak of 56,363.94, while the broader Topix index gained 2.3% to finish at 3,783.57. Takaichi's Liberal Democratic Party won 316 of 465 lower-house seats, strengthening her mandate to suspend the national sales tax on food for two years—a measure estimated to cost approximately 5 trillion yen ($32 billion) annually.
The Japanese yen reversed its earlier decline, snapping a six-day losing streak, as government officials expressed a "high sense of urgency" regarding currency movements, reviving speculation about potential foreign exchange intervention. The dollar was last seen trading around 0.4% lower against the yen at 156.56.
Currency and Funding Dynamics
China's currency, the renminbi, strengthened to its highest level since May 2023, with the onshore rate reaching 6.9284 per dollar. Analysts noted that Beijing's guidance on Treasury holdings was framed as a prudent risk management step rather than a geopolitical maneuver.
Attention in Japan has turned to how the new administration will finance its tax cuts without issuing fresh debt. This has sparked scrutiny of the country's substantial $1.4 trillion foreign exchange reserves, which are predominantly held in U.S. Treasuries and also serve as a potential war chest for yen-buying interventions. Economists caution that relying on reserve income for permanent funding could be unsustainable.
Market participants are now bracing for a data-heavy week from the United States, featuring releases on payrolls, retail sales, and consumer prices. With investor expectations heavily tilted toward an interest rate cut by the Federal Reserve in June, any upside surprises in the economic data could prompt a rapid reassessment of yields and the dollar's trajectory.
