In the interconnected fabric of today's global economy,shifts in national monetary policies can have ripple effects akin to the flapping of a butterfly's wings,potentially leading to considerable turbulence in international financial markets.Recently,Japan's inflation dynamics have captured significant attention,raising concerns about their potential cascading impacts,particularly on the U.S.stock market,exemplified by the Nasdaq.This upheaval may usher in unprecedented changes.

Delving into this situation is Dhaval Joshi,chief strategist at BCA Research,who reveals the underlying intricacies in his analysis.For an extended period,the Bank of Japan has firmly adhered to a zero-interest-rate policy,primarily driven by persistently low inflation rates,which have failed to reach the 2% target.Historically,Japan's economy seemed mired in a quagmire of low inflation,characterized by feeble consumer demand and cautious corporate investments,resulting in stagnation in price growth.However,recent indicators signal a subtle yet impactful shift in this trend,as Japan's inflation expectations gradually align with the 2% target level.This nuanced change is poised to unravel the foundational principle underpinning Japanese monetary policy,as the bedrock of the zero-interest environment — a climate of low inflation — begins to crumble.Additionally,the reality of Japan's real bond yields sinking into negative territory underscores the urgency for policy adjustments.

When we turn our gaze to global stock markets,the normalization of Japan's monetary policy unfolds like a ticking time bomb.Joshi's article effectively delineates Japan's role over the previous years as a "super engine" of liquidity in the global financial market.Thanks to its zero-interest-rate policy and expansive quantitative easing measures,capital from Japan has surged across the world like a tidal wave,acting as a key catalyst for the appreciation of various asset prices,with the stock markets reaping substantial benefits.The U.S.stock market,in particular,has seen its valuations soar amid this influx of investment.From emerging tech stocks to traditional blue-chip equities,the ample liquidity has instilled investor confidence regarding future earnings,thereby propelling stock prices higher.

Focusing on the tech sector within the U.S.stock market,a striking correlation emerges — the valuation of tech stocks tightly intertwined with Japanese bond yields.Through comprehensive data analysis,Joshi illustrates this relationship starkly.From 2019 to 2022,the Nasdaq's valuation,measured by the earnings yield metric,seemed to be on an invisible tether with U.S.real bond yields,tracking closely in a predictable alignment and corresponding seamlessly with economic theory.However,a pivotal moment arrived at the end of 2022 when the Nasdaq's valuation broke free from this linkage with U.S.real bond yields,aligning instead with Japan — the only other major economy still grappling with negative real bond yields.Even more strikingly,during the period of 2023 to 2024,the yields of the Nasdaq index and Japanese real bond yields mirrored each other almost perfectly,demonstrating synchronous fluctuations.This phenomenon highlights a critical insight: the principal threat challenging U.S.tech stock valuations no longer emanates from domestic bond yield fluctuations but hangs ominously over them from the sword of Damocles that is Japanese real bond yields.

Currently,Japan's real yields have not yet embarked on a substantial upward trajectory,which allows U.S.tech stock valuations to find temporary refuge in a relatively stable environment,avoiding the stormy upheaval.However,taking a broader perspective while considering a 1 to 2-year structural timeline,the outlook appears grim.As Japan's inflation expectations converge toward its target rate,the normalization of monetary policy seems imminent,with a strong likelihood that Japan's real yields will rise significantly.Should this occur,the robust liquidity that has nourished the soaring valuations in stock markets over the past two years will diminish.This scenario stands as a formidable test for the U.S.stock market,particularly for the Nasdaq,which houses a cluster of tech stocks.

Underpinned by keen analyses of macroeconomic trends and market interconnectivity,Joshi astutely provides investment recommendations for navigating this complex landscape.He emphasizes that investors must vigilantly monitor key indicators such as the USD/JPY exchange rate,as well as the ratio of the Nasdaq index to the yield of 30-year U.S.Treasury bonds.These metrics serve as market "barometers" and "warning signals" — when their underlying complexities reach a critical threshold,edging toward collapse,it may forewarn of imminent volatility and sharp reversals in market dynamics.As global economic uncertainties grow,discerning these subtle interrelations and strategically positioning oneself can aid investors in navigating the waves of financial fluctuations,seizing investment opportunities while mitigating potential risks.