(Bloomberg) -- The risks are piling up for Japan’s currency, stocks and bonds as the nation’s fiscal year draws to an end right when many global markets close for Easter — and less then two weeks after the central bank hiked interest rates.

Added to that, the Federal Reserve’s preferred measure of inflation due Friday may fuel the view that US interest rates aren’t likely to come down any time soon, possibly distorting moves in the yen against the dollar with many US traders on holiday. It’s the first time since 2018 that the Easter holidays have fallen squarely at the end of March. 

The timing may lead to choppy trading in the yen after Japan’s currency on Wednesday hit the weakest level against the dollar since 1990, prompting authorities to ramp up warnings about stepping into the foreign-exchange markets.

“Beware of unexpected movements in currency markets,” said Yoshio Iguchi, managing director at Traders Securities Co. in Tokyo. “Liquidity is expected to decline starting in Tokyo from March 29, and the bid-offer spread will widen into European hours, meaning arbitrage trading is likely to increase.” 

Meanwhile, Japanese stocks will lack guidance from US markets, leaving them vulnerable to profit-taking after a stellar performance this year. The risks are heightened by domestic investors adjusting to positive interest rates after the Bank of Japan’s historic policy move on March 19, especially as they close out books on the last trading day of the financial year Friday.

Here’s a look into some factors that may influence markets:

Intervention Threat

The BOJ’s first interest-rate hike since 2007 has failed to arrest the yen’s decline, meaning that policymakers are running out of choices short of buying the currency to prop it up. Officials have reiterated that financial conditions will remain accommodative, bringing into sharp relief the yield differential with the US.

“From a risk-reward perspective, one cannot buy the dollar at the ¥151 level and leave it there, as there is a risk that intervention could push the yen higher by about five yen,” said Iguchi. There’s also the possibility that the Japanese currency will test 152 against the dollar as thin liquidity amplifies price movements, he said. 

Read more: A Trader’s Guide to Japanese Policymakers’ Language on the Yen

Declining Liquidity

The PCE deflator will be released in the US on Friday. This measure of consumer spending matters because Fed officials favor its reading on the pace of inflation, a key factor that will affect when they will start to cut interest rates. 

Any indication of whether the gaping chasm in yields between the US and Japan is set to narrow has the potential to affect trading of the yen against the dollar. Japanese government bond yields are also steered by moves in Treasury yields, and so a lack of clear US reaction to Friday’s data will make it harder for Japan’s debt market to find direction.

US markets reopen on Monday, but other major economies including Australia, the UK, France and Germany are still closed. The Securities Industry and Financial Markets Association advises an early end of Treasury bond trading at 3 p.m. in Tokyo on April 1 for Easter Monday.

Profit-Taking

BOJ Governor Kazuo Ueda’s rate move last week did little to damp sentiment toward Japanese stocks, with the Nikkei 225 Stock Average reaching another record. That’s fueled concerns an about 20% gain this year - making the blue-chip index one of the best performers globally - may be overdone. The broader Topix index is just 4% away from reaching an all-time high last seen in December 1989.

“The usual pattern for banks is to sell and take profits at the start of April, so I’m not so optimistic about the beginning of next week,” said Ryuta Otsuka, a strategist at Toyo Securities Co. “The Nikkei is in the 40,000 range and is approaching 41,000 again, so there is likely to be a fair amount of selling.”

Nikkei Rebalancing

Changes in the Nikkei 225 on the last day of March may result in fluctuations of some stocks as investors adjust their portfolios, Junichi Hashimoto, a quantitative analyst at Daiwa Securities Co. wrote in a report this month.

The rebalancing may make it more difficult to gauge supply and demand in the equity market, said Toyo Securities’ Otsuka.

Bond Indexes

Demand for sovereign debt may vary, with a scheduled extension of duration in a government bond index supporting longer-dated debt. Wednesday’s auction of Japan’s 40-year debt was also strongly received, despite speculation the central bank will tighten policy further.

“Domestic investors may not hold a trading position at the end of the fiscal year, and the market may swing easily,” said Naoya Hasegawa, a senior bond strategist at Okasan Securities Co. “A cautious trading response may be required.”

--With assistance from Masaki Kondo and Hidenori Yamanaka.

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