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many investors may still remember the "black monday" in early august this year. on august 5, the bank of japan's july rate hike triggered a large-scale liquidation of yen carry trades, and the yen rebounded, causing market panic. global stock, foreign exchange and bond markets fluctuated sharply, with japanese stocks setting an astonishing record of a 12% plunge in a single day.

recently, arif husain, head of fixed income at t. rowe price, who has 30 years of investment experience, said he warned of the risk of japan's interest rate hikes as early as last year. he warned that investors have only "just seen the early stages of this disaster, and there will be more market volatility in the future."

is “black monday” just the beginning?

hussein wrote in the report that on the surface, the "black monday" on august 5 was due to the hawkish signals sent by the bank of japan and market concerns about slowing us economic growth, which triggered the unwinding of yen carry trades and pushed up the yen's exchange rate.

but investors may be overlooking the deeper causes of the global stock, currency and bond rout:as interest rates in japan continue to rise, a large amount of japanese funds invested overseas may flow back to japan.

"using the yen carry trade as a scapegoat ignores the beginning of a much larger, deeper trend," hussain said. "boj tightening and its impact on global capital flows is not simple and will have huge consequences for years to come."

the return of japanese funds will affect the global market

although the yen has now stabilized in a trading range of around 140 yen against the dollar nearly a month after black monday, market volatility is still rising.

hussein predicts thatthe federal reserve's virtually certain september rate cut and the bank of japan's expected further tightening could soon shock markets again.

hussain prefers to be overweight on japanese government bonds, as he sees capital likely to flow back to japan as yields climb. he also prefers to be underweight on u.s. treasuries, which he sees as likely to come under pressure as japanese institutional money moves back home from the u.s.

japan's 10-year government bond yield rose one basis point to 0.915% on tuesday, the highest level since august 6.

“to the extent that higher japanese yields could entice the country’s large life insurance and pension investors to move out of other government bonds and back into jgbs… this would, in effect, recalibrate demand in global markets,” hussain wrote.