Brothers, the largest arbitrage in history has been ended by Japan! At present, the market reaction is relatively stable, indicating that the "interest rate hike itself" has been priced in advance, and the focus has shifted to subsequent certainty. The Bank of Japan announced a rate hike, raising the benchmark interest rate from 0.5% to 0.75%, the highest level since 1995. Just raising it a little bit, why did the self media explode and say why did the global financial market have to go on Douyin and Douyin? There is a background that needs to be explained to everyone here. After the collapse of Japan's real estate foam in 1990, Japan began to cut interest rates continuously, all the way down to zero, that is to say, if you save money in Japan, the interest is equal to zero, and even ask you for storage fees. But looking at it from a different perspective, the cost of borrowing money is also zero! So financial institutions around the world set their sights on Japan, and those with the conditions came to Japan to borrow money. Japan became the cheapest faucet in the world and continued to supply yen to the world. There are two typical cases, one is investors represented by Buffett, and the other is the group of Japanese Mrs. Watanabe. 1. Buffett's Berkshire Hathaway issued a total of approximately 1.2 trillion yen denominated bonds with an interest rate of around 1% between 2019 and 2023. Then he bought a large amount of stocks from the five major Japanese trading companies, whose dividend yields were generally around 4% -5% at that time, far higher than his cost of borrowing Japanese bonds, and could be said to have made a lot of money. Later, Buffett used the money he earned in Japan to support his investments in the United States and around the world. Borrowing a large amount of Japan at an extremely low cost to buy high dividend assets, Buffett's operation is like a textbook level "empty handed white wolf". After Buffett, many investors with large amounts of funds imitated this type of investment behavior. 2. The first group to implement this practice was actually the famous Watanabe housewives in Japan. After implementing zero interest rates in Japan, the group of Mrs. Watanabe discovered that since money kept at home does not appreciate, while US bonds have a 5% interest rate, and deposit interest rates in countries such as Australia and New Zealand are 5% and 6%, isn't this just a free profit difference? The operation of Mrs. Watanabe is actually the same game as Wall Street, only on a smaller scale. They borrow a sum of Japanese yen from the Bank of Japan using their family savings or property as collateral. Going to the foreign exchange market again, exchanging this Japanese yen for US dollars to buy US bonds, Australian dollars, or any assets with higher returns such as European stocks, Southeast Asian real estate, etc., and enjoying high interest rates of 5-6% per year, this is called "earning interest margin". In addition, the Japanese yen continues to depreciate, and these Watanabe ladies not only earn interest rate differentials, but also exchange rate differentials, making a double profit. But this gameplay has two prerequisites: 1. The Japanese yen depreciates against foreign currencies all the way, and 2. Japan continues to have low interest rates. Nowadays, Japan's interest rate hike means that this balance has been broken, and the foundation of this game that has been played for more than 20 years is shaking. What the market is afraid of is not Japan's interest rate hike itself, because this time it is only a tiny fraction, from 0.5% to 0.75%, which may not have a significant impact on deposit interest rates. But this action symbolizes a transition of time: Japan's global loose monetary system, which has lasted for thirty years, is undergoing restructuring, and the future is no longer a free faucet. Especially for Wall Street hedge funds that use hundreds of times leverage, the borrowing cost used to be 0.1%, but now it has become 0.75% or even higher, and many logics will be rewritten. Investors represented by Buffett may retreat, and the group of Japanese Mrs. Watanabe may also take action. Don't look at the group of Mrs. Watanabe. Although she represents full-time housewives, in Japanese society, men are responsible for making money and women are responsible for managing household assets. Therefore, the Mrs. Watanabe group is equivalent to holding the financial power of middle-class families in Japan, with a huge scale. The scale of global yen arbitrage funds is currently estimated to be around $1.5 trillion, with a peak of over $2.5 trillion. It is said that Mrs. Watanabe holds trillions of dollars worth of assets in Japanese households, accounting for nearly one-third of the global foreign exchange retail market in terms of trading volume. In addition, according to publicly available information, Japan's insurance and pension funds hold approximately $2 trillion in overseas assets. In short, Japan is basically arbitrage from top to bottom, from official to private. Once Japan raises interest rates, investors will sell their US stocks and bonds, exchange the money back for Japanese yen, and return it to the Bank of Japan. As funds begin to withdraw from the US stock/US bond/European bond markets and return to Japan, there will be a tightening effect in global financial markets, affecting US stocks, US bonds, as well as Japanese stocks and bonds. So everyone can understand why Japan's interest rate hike has caused the global financial market to shake three times, which is actually draining liquidity from the global market. Many people online are now worried that the sharp decline of yen arbitrage funds may trigger a major drop in the US and Japanese stock and bond markets, and even trigger a financial storm. The impact is definitely there, and calling it a financial storm is an exaggeration. At least after the announcement of the Bank of Japan's interest rate hike today, major financial markets around the world have risen, including Japan. Japan is actually not raising interest rates for the first time. It has already raised interest rates four times since last year, so the market has already digested this news. In other words, the panic earlier was just a stir fry of cold rice. But Japan's interest rate hike is a very important signal for the world, as it means the last safety cushion is gone. Japan has low interest rates and stable funds, and has always been known as a safe haven fund. In the past, when financial crises occurred, investors from various countries would exchange their money for Japanese yen as a safe haven, and this safety cushion will no longer exist in the future. And Mrs. Watanabe's largest ever interest rate arbitrage will soon come to an end. Speaking of which, Japan's interest rate hike actually has a significant impact on us, but I think the reason why everyone should pay attention is actually to remind everyone. We will gradually enter a low interest rate society like Japan in the future. How should we manage our assets well in the future? Mrs. Watanabe from Japan gave us a great example, like looking out for some safe and profitable assets with spreads There has been an interesting topic discussion online recently. Hong Kong people coming to Shenzhen to buy social security and mainland Chinese people going to Hong Kong to buy insurance are essentially arbitrage, just like Mrs. Watanabe's global investments. In recent years, many Hong Kong people have gone to Shenzhen to buy social security. Shenzhen has fast medical treatment, good quality, and retirement benefits in the future. From an investment perspective, the return rate is very good, and there is no waste. However, the mainland is currently facing investment panic, with investment interest rates of less than 2%, leaving a large amount of funds nowhere to go. Hong Kong is also its own place, and Hong Kong people have longer lifespans than mainland life insurance, with more favorable actuarial models. As a result, a large number of middle-class wealthy people from the mainland have come to Hong Kong to buy insurance and manage their finances. The phenomenon of both sides running to the other side to buy financial products is essentially exploiting institutional loopholes for arbitrage, similar to Mrs. Watanabe. In this era of low interest rates, how can we ensure the safety of our assets while also earning certain returns? This is an important topic that we need to learn for the next ten or twenty years.