The Federal Reserve's interest rate cuts can hedge against some of the negative impacts of the Bank of Japan's interest rate hikes.

When Japan's medium- to long-term yields rise rapidly and the global carry trade structure is forced to contract, the pressure on the entire system concentrates on two aspects: "compressed interest rate differentials" and "withdrawn financing." The Federal Reserve's interest rate cuts can provide a buffer in these two areas.

A. By lowering the cost of dollar financing to maintain the USD/JPY interest rate differential, the global carry trade can at least remain within an operable range, preventing a collective breach that triggers systemic deleveraging. However, whether the interest rate differential can be maintained depends on whether the rate cut is greater than the speed of Japan's yield increase; otherwise, it can only partially offset the impact and cannot truly maintain the differential.

B. The Federal Reserve's interest rate cuts will bring new liquidity, allowing the market to have at least some new liquidity in the face of passive unwinding pressure caused by the Bank of Japan's interest rate hikes, thus avoiding liquidity withdrawal.

However, this is still merely a "hedge," not a "reversal," because the rise in Japanese interest rates represents a structural change. It will lead Japanese pensions, life insurance funds, and domestic banks to reassess the risk-return profile of U.S. assets, resulting in a cyclical capital inflow (until the next period of zero interest rates in Japan).

The Federal Reserve's interest rate cuts can only influence short-term financing costs and risk appetite; they cannot change the shifts in Japan's domestic interest rate system. In the short term, the Fed's rate cuts can stabilize sentiment, raise risk appetite, and mitigate the chain reaction of forced liquidations, but in the long term, the rise in Japan's interest rate structure will continue to exert pressure on global liquidity.

This situation can only be adapted to, but the inflow of Japanese capital does not equate to a global capital inflow. The U.S. AI sector belongs to a structural track where global capital is concentrated, so U.S. tech stocks may still attract investments from Europe, the Middle East, and domestic U.S. funds. Even if Japan contracts, other regions will still invest, and this includes Japanese institutions and funds as well.

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