China has ‘bigger fish to fry’ despite Japan upping interest rates for first time in 17 years

Japan’s decision to raise the cost of borrowing for the first time in 17 years this week is seen to offer yen assets a boost, but the impact of higher rates on China’s currency and cross-border capital flows might be marginal, according to analysts.

The move briefly drove up Japanese stocks, with the Nikkei 225 index having gained 19.5 per cent since the start of the year, while the yen is up 5.9 per cent against the US dollar.

But analysts do not expect any direct impact on China as overseas investors are more concerned with the effectiveness of Beijing’s easing measures, which are aimed at supporting sustainable economic growth in the world’s second-largest economy.

The People’s Bank of China (PBOC) is seen to be walking a fine line between maintaining the stability of the yuan and rate cuts, because lowering interest rates could increase pressure on its currency, which has already depreciated 1.47 per cent against the US dollar since the start of the year.

Further yuan weakness against the US dollar could trigger fund outflows from yuan-denominated assets, a move that could be destabilising for China’s capital markets.

“The PBOC has bigger fish to fry than [the] BOJ hike. China’s domestic economy is struggling to get out of first gear, held back by the collapsing property market and hesitant households. The need to turn that around trumps all else,” said Harry Murphy Cruise, an assistant director and economist at Moody’s Analytics.

China’s state-run funds have stepped up buying stocks to support domestic prices since January, when the onshore stock market kept falling, further dampening investors confidence in the country’s overall economic resilience.

Chinese regulators have pledged to continue efforts to facilitate