BOJ's rate hike spurs market mayhem as Nomura takes historic tumble

A senior executive at Nomura Holdings Inc. defended the Bank of Japan's decision to raise interest rates last week despite the turmoil it's causing in global equity markets. Christopher Willcox, the Japanese brokerage's head of trading and investment banking, came out in support of the BOJ move in an interview with Bloomberg Television after global markets tumbled.

This global stock market rout was largely due to fears over the outlook of the US economy and a divergence of central bank policies. Japan's benchmark Topix Index suffered a record two-day decline before rebounding Tuesday, as worries over further interest-rate increases and gains in the yen spooked investors.

Willcox said, "The BOJ has been wholly vindicated. Unwinding is likely to be bumpy." His remarks were during a period when Nomura's share was running through huge volatility. They dropped around 19 per cent on Monday—its biggest slide in at least five decades—to wipe out much of this year's gain despite better earnings. Nomura was up 11 per cent on Tuesday as Topix recovered 9.3 per cent.

He also commented on the implications for the carry trade—a strategy in which investors borrow in low-interest currencies to invest in higher-yielding markets. Many closed positions following the rate hike by the BOJ. "If they did not move, it would have only gotten bigger," said Willcox. "The BOJ is playing very smartly."

The move by the Bank of Japan is more of a precautionary step against the possible risks of long-term low-interest rates, though it has immediate repercussions on markets. While some volatility may be witnessed further down the road, current leadership at Nomura believes that the BOJ strategy will, in the long run, help financial markets—underlining the tightrope that central banks have to walk with their policies.