Yesterday's decision by the ECB to raise rates was pretty much expected. What wasn't expected was the hawkish comments that accompanied that rate increase with hints of more to come. The Japanese have been talking about doing the same and may do so before the month is out. From a global standpoint, I find the impending Japanese move to raise rates more significant. For one thing, Japan is the second biggest economy in the world. Another reason (that I've written about before) is my belief that Japanese deflation has been one of the reasons that long-term bond yields have stayed so low. Yields on the Japanese 10-year bond rose this week to the highest level in eighteen months (1.64%). It was reported this morning in Tokyo that core consumer prices rose 0.5% in February which is the highest since 1998 (when global deflationary problems started). Earlier this year, I wrote about the correlation between with the rise in the Japanese stock market (which hinted at an end to Japanese deflation) and the rise in gold. Both are pointing to higher global inflation and interest rates. Up to now, only the U.S. has been raising short-term rates which may explain why bond yields have stayed down. With the rest of the world starting to raise rates as well, I suspect that bond yields are finally starting to move higher. Chart 6 shows how close they are to doing just that.
