Trump's Greenland Tariff Threat Shakes the US Dollar

The yield on Japanese government bonds (JGBs) surged on Monday, with the benchmark 10-year rate hitting a 27-year high as markets braced for a wave of government spending ahead of an anticipated snap election.

Investors sold off Japanese debt amid expectations that Prime Minister Sanae Takaichi’s government will increase spending and issue more bonds. The yield on the 10-year JGB climbed past 2.2% in the morning and reached 2.24% in the afternoon, a jump of 0.055 percentage points from the previous week. Bond yields rise as their prices fall.

Figure 1: Japan's 10-year government bond yield has surged to a 27-year high, reversing a multi-decade downtrend as markets price in higher government spending and debt.

Election Promises Drive Bond Sell-Off

The sell-off is directly tied to the political landscape, as major parties prepare for an election expected next month. They are crafting platforms that promise significant fiscal support for an electorate struggling with persistent inflation and declining real wages. Japan's core inflation was 3.0% in November, and inflation-adjusted wages have been in negative territory for 11 consecutive months.

The primary catalyst for the market's reaction is the widespread discussion of a potential cut to the consumption tax.

A new political alliance formed by the Constitutional Democratic Party (CDP) and Komeito is advocating for the elimination of the 8% consumption tax on food items. This move has pressured the ruling Liberal Democratic Party to consider a two-year suspension of the same tax. The unexpected formation of the CDP-Komeito alliance suggests a more competitive election, raising the stakes for Takaichi.

Quantifying the Fiscal Impact

According to Noriatsu Tanji, chief fixed-income strategist at Mizuho Securities, a freeze on the food consumption tax would cost the government an estimated 5 trillion yen ($32 billion) annually. "A fiscal measure worth a total of 10 trillion yen over two years is a fairly large spending program," he noted.

While Prime Minister Takaichi has stated she will balance fiscal activism with long-term fiscal sustainability, investors are concerned that the pressures of a snap election will push sustainability to the side, at least for now.

Broader Pressures on the Bond Market

Beyond election politics, expectations of a more aggressive Bank of Japan (BOJ) are also fueling the upward trend in JGB yields. The central bank raised its policy rate from 0.5% to 0.75% on December 19, and markets are now anticipating that the BOJ may accelerate its pace of interest rate hikes beyond the current quarter-point increase every six months.

The pressure is evident across the entire bond market, not just in the 10-year benchmark. The yield on 20-year JGBs rose 0.09 points to 3.25%, while the 30-year JGB yield increased by 0.11 points to a record 3.58%.

However, some analysts question whether the proposed stimulus will be effective. Mizuho's Tanji expressed skepticism that temporary tax relief would significantly boost private spending, especially since food prices have already risen by 30% over the last five years.

President Donald Trump declared on Sunday that the United States would take action to counter a "Russian threat" emanating from Greenland, claiming Denmark has failed to address the issue.

In a social media post, Trump stated that NATO has been urging Denmark to resolve the situation for two decades. "Denmark has been unable to do anything about it," he wrote. "Now it is time, and it will be done."

Backing Rhetoric with Economic and Military Pressure

These comments follow recent threats from the U.S. president to levy trade tariffs of up to 25% on major European nations, including Denmark, France, and the UK.

The administration's stance was reinforced by Treasury Secretary Scott Bessent, who earlier on Sunday cited European "weakness" as a reason for the U.S. to take control of Greenland. President Trump has consistently framed the issue around American national security, repeatedly demanding that Greenland be handed over to the United States to neutralize a potential threat from Russia.

Trump has also suggested the possibility of military intervention in Greenland. This threat has gained credibility following a U.S. incursion in Venezuela earlier this year.

Europe Pushes Back as NATO Stability Wavers

European leaders have widely rejected Trump's claims and his tariff threats. France, in particular, has signaled it is considering retaliatory economic measures in response to the pressure from Washington.

Analysts warn that the persistent U.S. focus on Greenland is creating significant strain on the future of the NATO alliance. Greenland currently operates as an independently governed territory under the Kingdom of Denmark.

For decades, traders have viewed Iran through the lens of geopolitical conflict. The mere mention of the country conjures images of chokepoints in the Strait of Hormuz, a vital channel for global oil flow. But while markets fixate on the possibility of military action, the most significant danger to Iran's oil supply is far less dramatic: a labor strike by its own oil industry workers.

This distinction is critical. The risk of a US attack has cooled, yet the potential for labor unrest has quietly grown. A military strike scares the market but rarely disrupts supply for long. Widespread strikes, however, are often overlooked but have historically triggered massive production outages.

A Fragile Calm After Violent Protests

Recent protests in Iran were met with brutal state repression, and for now, the government has regained control of its major cities. The violence was severe, with a death toll potentially reaching several thousand, possibly making it the worst in the regime's 47-year history and surpassing the crackdowns of 1988, 1999, 2011, and 2022.

This suppression gave President Donald Trump an off-ramp. After initially encouraging protestors, Trump noted on January 14 that "the killing in Iran is stopping." When asked about military options, he adopted a wait-and-see approach.

But this sense of closure is misleading. The government can suppress dissent, but it cannot solve the severe economic crisis fueling public anger. The core grievances remain:

• Inflation is running near 50%.

• The national currency, the rial, is in free fall.

• Unemployment continues to rise.

Unless the authorities address this cost-of-living crisis, instability will persist, and with it, the risk of turmoil spreading to the country's vital oilfields.

Economic Rot and Calls for Disobedience

While international sanctions and low oil prices have damaged Iran's economy, the root problem is internal. The economy is increasingly defined by corruption and military control, with Supreme Leader Ali Khamenei's inner circle and the powerful Islamic Revolutionary Guards Corps (IRGC) dominating a vast network of local companies.

Without genuine economic and political reform, Iran appears headed for more turmoil. Raz Zimmt, an analyst at the Institute for National Security Studies in Tel Aviv, suggests the country could be entering a period of civil disobedience marked by sporadic eruptions of protest.

The 2018-2019 protests, which included nationwide strikes in sectors like transportation, offer a potential blueprint. On January 10, Reza Pahlavi, the exiled son of the Shah deposed in the 1979 revolution, called on protestors to cut the regime's "financial lifelines" by launching nationwide strikes in the oil, gas, and energy sectors.

The Historical Precedent: A Strike That Toppled a Regime

History proves that labor action can have a catastrophic impact on Iran's oil output. In mid-1978, a strike by oil workers caused production to collapse by roughly 80% in a matter of weeks. That event, which remains the largest oil outage in history, helped pave the way for the revolution that brought Ayatollah Khomeini to power the following year.

However, the industry has changed significantly since then. Several factors now make a repeat more difficult:

1. IRGC Control: The IRGC now tightly controls the oil industry, owning major infrastructure and employing loyal workers.

2. Heavy Security: The security apparatus maintains a firm grip on Khuzestan and Kohgiluyeh and Boyer-Ahmad, the two provinces where the largest oilfields are located.

3. Precarious Labor: Many oil employees are contract workers with little job security, making them less likely to risk their livelihoods by striking.

A Low-Risk, High-Impact Threat

Today, Iran produces nearly 5 million barrels a day of crude and other petroleum liquids, a level comparable to 1978. The potential for internal disruption remains a low-probability but high-impact scenario.

Crucially, this is a threat beyond Washington's control. The White House can calibrate military action to avoid hitting the energy sector, as it did in June when it discouraged attacks on oil facilities. But it cannot control the actions of protestors on the streets or in the oilfields. For those watching the energy markets, the real story isn't about bombs—it's about the workers.

HSBC is taking a contrarian stance on U.S. monetary policy, predicting the Federal Reserve will maintain current interest rates throughout 2026. The bank argues there is simply no macroeconomic justification for a rate reduction.

This forecast puts HSBC directly at odds with the prevailing market consensus, which anticipates one or two rate cuts in 2026.

Economic Tailwinds Supporting a Rate Hold

According to Frederic Neumann, HSBC's chief Asia economist, several factors will sustain U.S. economic growth and eliminate the need for rate cuts. These include the impact of tax cuts, a booming artificial intelligence (AI) hardware sector, and robust equity prices.

"HSBC is actually not expecting the Fed to cut interest rates," Neumann stated during a recent outlook webinar. He projects that U.S. growth will accelerate to 2.3% in 2026, an increase from 2.2% last year.

"It's not clear [if] the Fed necessarily has major macroeconomic justifications for cutting rates aggressively this year," Neumann added.

For context, the U.S. Fed delivered a 25 basis point cut in its December meeting last year, which brought the federal funds rate to a range of 3.5%-3.75%.

Political Pressure on the Central Bank

The Fed's policy decisions have unfolded amid heightened tensions between the Trump administration and Fed Chair Jerome Powell.

The central bank was served grand jury subpoenas concerning renovations at its headquarters. Powell alleged this action was a direct result of the Fed's refusal to align its interest rate policy with President Donald Trump's preferences.

While Powell's term as Fed Chair is set to end in May, he will remain a governor at the central bank until January 2028. The Federal Open Market Committee (FOMC) has scheduled its next policy meeting for January 27 and 28.

Romania’s central bank is set to maintain one of the highest interest rates in the European Union as it struggles to control inflation that is running close to 10%. The inflation rate is expected to cool only gradually over the coming months.

Benchmark Rate Held for 11th Straight Meeting

According to a Bloomberg survey, economists unanimously predict the National Bank of Romania will hold its benchmark interest rate at 6.5% for the eleventh consecutive meeting.

This rate, matched within the EU only by neighboring Hungary, has been in place for a year and a half. During this period, the Black Sea nation has navigated significant political turmoil and a market selloff.

Fiscal Policy Fuels Stubborn Price Pressures

The central bank faces persistent price pressures driven by the government's fiscal policies. In an effort to reduce the EU's widest budget deficit, the ruling coalition has implemented several key measures:

• Increases in value-added tax (VAT)

• Higher excise duties

• Removal of a price cap on energy

These actions contributed to an inflation rate of 9.7% in December.

Rate Cuts Unlikely Before Q3, Analysts Say

Despite the high inflation, a rate hike is considered improbable. Kevin Daly, an economist at Goldman Sachs Group Inc. in London, noted that the primary drivers of inflation are beyond the central bank's direct control.

"The elevated inflation has primarily been due to two factors that are beyond the control of monetary policy — the removal of the energy price cap and a VAT rate hike," Daly stated in a report. He predicts that interest rates will likely remain on hold until at least the third quarter of this year.

Governor Mugur Isarescu also signaled in November that any discussions about potential rate cuts would likely not begin before the summer. The central bank, which targets an inflation range of 1.5% to 3.5%, forecasts that price growth will slow to 3.7% by the end of this year.

China's birthrate fell last year to its lowest level since 1949, highlighting a deepening demographic struggle for Beijing even as officials roll out new subsidies to encourage couples to have more children.

The number of births per 1,000 people dropped to 5.6, the lowest since at least the founding of the People's Republic, according to data released by the National Statistics Bureau on Monday. The number of newborns decreased 1.6 million, the most since 2020, to 7.9 million.

The figure is a setback for President Xi Jinping's campaign to promote a fertility-friendly society including by offering cash rewards for parents. The total population fell by 3.4 million, the sharpest drop since the 1960 Great Famine under former leader Mao Zedong, to 1.405 billion.

A shrinking workforce and ageing population are major threats to the world's second-largest economy. As the elderly cohort grows, the worker-to-retiree ratio shrinks, piling more pressure on the underfunded pension system.

To counter these structural headwinds, the Chinese government has implemented a series of pro-natalist policies in recent years, from extending paternity and maternity leave to making it easier to register a marriage.

Among the incentives, couples are offered about US$500 (RM2,028.50) a year for each child born on or after Jan 1, 2025, until they reach the age of three. Starting this year, the government also imposed a 13% value-added tax on contraceptive drugs and devices, including morning-after pills and condoms.

He Yafu, an independent demographer, said the amount of government subsidies is "too small" to meaningfully lift birth rates.

He attributed the drop to young people's unwillingness to get married and a decline in the number of women of childbearing age, which fell by 16 million from 2020 to 2025.

This shrinking pool of potential mothers is partly the result of the one-child policy, which hollowed out the demographic base for future growth before being scrapped in 2015.

Source: Theedgemarkets