The BoJ decision matters less for the 25 bps move itself and more for what it symbolises.
On a potential market reversal
A “normal” BoJ hike would close the final chapter of ultra-easy global monetary policy. Psychologically, this is the shoe many markets have been waiting to see drop. The risk is not Japan per se, but the secondary effects. Higher Japanese yields can encourage capital repatriation, putting upward pressure on global yields and the USD funding complex. That tends to tighten financial conditions at the margin, which is unfriendly for richly valued US equities, especially momentum-driven AI and growth names.
That said, a single BoJ hike is unlikely to be a standalone trigger for a full reversal unless it coincides with rising US yields, hawkish Fed repricing, or disappointing US earnings guidance. Without those, any pullback is more likely to be corrective rather than cyclical.
On the Santa rally
A Santa rally is still plausible, but it would be narrower and more selective. If the BoJ frames the hike as cautious, data-dependent, and not the start of an aggressive tightening cycle, markets can absorb it. Seasonal flows, year-end positioning, and under-invested funds can still support equities, particularly defensives, quality cash-flow names, and non-USD assets.
However, the upside is unlikely to be broad-based risk-on. Volatility may rise, leadership may rotate, and rallies may fade faster than in prior years.
Bottom line
The BoJ hike raises tail risk and shortens the runway for complacency, but it does not automatically end the rally. A Santa rally can still occur, yet it will likely be fragile, tactical, and selective rather than exuberant.
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