Asian equities staged a broad-based rally on Tuesday, climbing to their highest levels in over two years as resurgent bets on imminent US Federal Reserve rate cuts overpowered regional unease sparked by the Bank of Japan’s historic policy shift.
The MSCI Asia-Pacific ex-Japan index surged 1.8%, led by technology and financial stocks, with notable gains across Greater China and Southeast Asia. The upbeat sentiment marks a sharp reversal from last week’s volatility, underscoring how global monetary policy expectations remain the dominant driver for regional risk assets.
The Fed Factor: A Renewed Tailwind
The catalyst for the rally originated from across the Pacific. Weaker-than-expected US manufacturing data released Monday fueled fresh conviction that the Federal Reserve will begin cutting interest rates as early as June. This sent US Treasury yields tumbling, with the benchmark 10-year yield falling nearly 10 basis points.
“For Asian markets, the calculus is straightforward,” said Linh Pham, Head of Asia Macro Strategy at Mariana Capital. “Lower US yields reduce the pressure on regional currencies, ease the cost of dollar-denominated debt, and make high-growth Asian equities more attractive. The Fed’s potential pivot is acting as a powerful relief valve.”
This dynamic was most evident in rate-sensitive markets. Hong Kong’s Hang Seng Index jumped 2.4%, while South Korea’s KOSPI and Taiwan’s TAIEX both gained over 1.5%. Emerging Southeast Asian markets like Thailand and Indonesia also posted strong gains.
Japan’s Quiet Storm: Unease Beneath the Surface
The broad rally unfolded even as investors continued to digest the Bank of Japan’s (BOJ) landmark decision to end its eight-year experiment with negative interest rates and yield curve control. While the move was well-telegraphed, its long-term implications are creating underlying tension.
Japanese government bond (JGB) yields have crept higher, with the 10-year JGB yield touching 0.77%, its highest level since November. This rise reflects the market’s adjustment to a new era where the BOJ is no longer a relentless buyer and Japan’s own monetary policy is tightening, however gradually.
“Japan’s bond market is navigating uncharted waters,” noted Kenji Yamamoto, Senior Fixed Income Strategist at Sakura Securities in Tokyo. “The unease isn’t about a spike in yields, but about the removal of a constant backstop. This introduces a new source of volatility that global funds are watching closely.”
The Nikkei 225, after soaring to record highs recently, was a relative underperformer, dipping 0.2% as the stronger yen and higher domestic yields weighed on some export-heavy constituents.
The Delicate Balance: Diverging Policies
The current market dynamic highlights a delicate balancing act for Asian investors. Two of the world’s most systemically important central banks are moving in opposite directions: the Fed toward easing and the BOJ toward tightening—a scenario not seen in a generation.
Analysts suggest that for now, the Fed’s influence is paramount.
“The gravitational pull of US liquidity expectations is still stronger than Japan’s policy normalization,” explained Priya Mehra, Global Macro Economist at Frontier Insights. “Japan’s shift is a slow-burning story of fiscal sustainability and normalized rates. The Fed’s shift is a near-term story of risk appetite and capital flows. Today, the near-term won out.”
However, she cautioned that Japan’s journey could become a headwind later in the year. “If JGB yields continue a sustained climb, they could eventually alter the global cost of capital and challenge the ‘search for yield’ trade that has benefited Asia.”
Sector Winners and the Path Ahead
The prospect of lower US borrowing costs provided a direct boost to Asian technology firms, which often rely on external funding and trade at high valuations. Property developers across China and Hong Kong also rallied on hopes of eased financial conditions.
The immediate path for Asian markets appears tied to US economic data and Fed communication. Further signs of a cooling US economy will likely extend the rally. However, traders will be monitoring Japanese bond markets for any signs of destabilizing volatility that could remind investors of the new regime taking hold in Tokyo.
For now, the message from the markets is clear: the hope for cheaper dollar liquidity is a potent force, capable of temporarily overshadowing even the most significant regional policy shifts.