The Hong Kong dollar is tied closely to the US dollar. Monetary policy made in Washington therefore applies directly in Wan Chai and Kowloon. In recent months, the Hong Kong Monetary Authority has been obliged to shrink its balance sheet rapidly to maintain the fixed exchange rate. This serves as a real-life policy experiment of the effects of quantitative tightening in a financial system. So far, nothing has blown up, but Hong Kong equities have been under pressure as financial conditions have tightened.
The Bank of Japan is trying to convince the market that there is “nothing to see here” despite a sharp drop in its asset purchase flow from ¥80 trillion to ¥60 trillion per annum. Add this to the list of reasons to worry about potential yen appreciation, but don’t think of it as a leading concern for global rates or risk assets.