🌞 Japan's new dawn

What’s going on here?

Faced with long nights worrying about inflation, the Bank of Japan (BoJ) claimed to have seen the light, welcoming a rebirth of financial control.

What does this mean?

Japan’s economy has been stuck in the mud for decades, and the country’s central bank has battled that deflation with “yield curve control” since 2016. The tactic involves keeping both short and long-term interest rates low, which should get the country shopping and put some meat on prices’ bones. That eventually worked a little too well though, so faced with the fresh foe of above-target inflation, the BoJ loosened its grip on 10-year government bond yields – a key long-term interest rate – a few months ago. And on Tuesday, it relinquished even more control. The bank no longer has a rigid upper limit set on the 10-year yield, meaning investors can have a bigger impact on determining its rise and fall. Case in point: the 10-year government bond yield hit its highest point in nearly nine years after the announcement.

Why should I care?

For markets: Loyalty counts for nothing.

While it’s clear that the BoJ is branching out from yield curve control, the central bank has kept the plan’s juicier details to itself – and that might be a careful ploy. Investors may want higher returns for the increased uncertainty involved in holding Japanese bonds, which should have the ripple effect of increasing interest rates. And because higher rates would also make the country’s currency more attractive to foreign investors, a fresh flush of popularity could prevent the yen from falling any further.

The bigger picture: The world is changing.

Interest rates, global trading relationships, and geopolitical tensions could transform markets for good. And in that sort of environment, there’s no guarantee that yesterday’s top-performing investments or sectors will still be winners tomorrow. Diversification, then, is key: commodities, “tangible assets” like real estate, bonds, and even a spot of crypto could spread out the risk that stocks can carry.

What’s going on here?

Crude oil could cost over $150 a barrel if conflict in the Middle East intensifies, according to the World Bank’s warning on Monday.

What does this mean?

The World Bank had expected the tepid global economy to drag commodity prices down by about 4% next year, with oil prices dipping to around $81 a barrel from this quarter’s $90. But the longer conflict in the Middle East continues, the more volatile energy and food prices may be. So far, oil prices have held up relatively steady. Yet in the worst-case scenario – that’s if major producers like Saudi Arabia limit their exports of the slippery stuff – prices could fly to between $140 and $157 a barrel. And even if less extreme supply cuts take hold, oil could still hit up to $121.

Why should I care?

For markets: The tide that lifts all prices.

European gas prices have already picked up this month, with investors concerned that supply may get scarce. And because energy is a key cost for every business, the price of goods and services across the board will likely go along for the ride if gas prices keep ticking upward. That’s a recipe for higher inflation and interest rates, the opposite of what the languishing global economy needs.

The bigger picture: One man’s trash is another’s treasure.

Big US oil companies will be foaming at the mouth thinking about the prospect of bloated oil prices. Major firms like Exxon and Chevron have recently made hefty acquisitions, underpinned by the belief that the world will still rely on oil for years to come. What’s more, the deals are designed to make the massive companies more flexible by enlisting smaller, local resources, allowing them to react faster when the volatile market shifts. So if the World Bank’s worst-case scenario does come true, you can bet Big Oil will be ready to act.