ORLANDO, Florida, Jan 15 (Reuters) - Solid U.S. bank earnings and a rebound in tech lifted U.S. stocks on Thursday, with global risk appetite also fueled by - and oil prices clobbered by - a more moderate tone from U.S. President Donald Trump on tensions with Iran.

More of that below. In my column today I look at Japan's return to economic normality after years of zero interest rates and deflation. But the brave new world of inflation and rising bond yields brings uncertainty and volatility.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Trump sees Iranian crackdown easing, Tehran denies manto be executed 2. Oil traders wrestle with geopolitical trifecta andelusive glut: Bousso 3. Exclusive-Trump says he has no plan to fire Fed's Powelldespite investigation 4. Is that it? The great dollar reversal fizzles: MikeDolan 5. TSMC smashes forecasts with record profit, flags moreU.S. factoriesToday's Key Market Moves

* STOCKS: Fresh peaks for UK FTSE 100, euro STOXX 600,Japan's ‌Topix, and in Brazil, Mexico and South Korea. * SECTORS/SHARES: U.S. tech +0.5%, utilities +1%,financials +0.4%. Energy -0.8%. Chips on a roll - Philadelphiasemiconductor index +2%, now +10% YTD. BlackRock, Morgan Stanley+6%. * FX: Dollar index +0.3% to six-week high, up most vs NOKas oil slumps. Biggest climbers are EM currencies including MXN,BRL and ZAR. * BONDS: 2-year U.S. yield nudges 3.57%, highest in amonth. Curve bear flattens, rate cut bets shift to July fromJune. * COMMODITIES/METALS: Oil slumps 4%, biggest ​fall sinceJune. Gold, silver ease back from record highs.Today's Talking Points

* Oil on the slide

Oil is on a wild ride, buffeted by geopolitical tensions in large part sparked by the Trump administration's military foray into Venezuela, and events in Iran. On Wednesday, Brent crude ‍was at a three-and-a-half-month high, up almost 10% year-to-date.

On Thursday, it posted its biggest fall since June after Trump said the crackdown on protesters in Iran was easing. If the threat of U.S.-Iran ⁠conflict cools, oversupply returns as the main market driver. But as this ⁠year has clearly shown, Trump's foreign policy agenda is, if nothing else, unpredictable.

* Fed bets fade, curves flatten

Fed rate cut bets are fading. The next fully priced cut is drifting to July from June, and 50 bps of easing this year is no longer fully baked into the 2026 curve. Stronger-than-forecast economic data and sticky inflation are behind the moves.

Among the ‌ripple effects on markets is a flattening of the yield curve. Most parts of the U.S. curve are now at their flattest in a month, ​with the 2s/30s curve narrowing 20 bps from its four-year peak just last week.

* Dollar and the odd yuan out

The U.S. dollar continues to grind higher, as Fed rate cut expectations whittle away. The greenback on Wednesday hit an 18-month high against the yen, and on Thursday a six-week high against a basket of major currencies.

The big exception is against China's yuan. The dollar is now firmly below 7.00 yuan at its weakest since mid-2023. With China ⁠racking up a record $1.2 trillion trade surplus last year, Beijing can point to dollar/yuan and reasonably argue it is not keeping its ‍currency artificially weak.

Japan's long-awaited return to normalcy ​brings uncertainty, volatility

Japan's economy is returning to something resembling normality for the first time in decades. That's likely to mean more volatility ahead for the yen and other Japanese assets, as investors try to make sense of this new reality.  

    While Japanese equities are rising to levels never seen before, that is less remarkable because many other countries' stock markets are also hitting new all-time peaks. The more intriguing market moves in Japan are happening in government bonds (JGBs) and the yen.

    Bond ‍yields across the JGB curve are at multi-decade or record highs, marking a stark disconnect from other major debt markets like the U.S., where Treasury yields have been fairly stable in recent months.

    The yen, which was the worst-performing major currency against the dollar last year, has weakened even more to kick off 2026. On Wednesday, it fell to an 18-month low around 160 per dollar, territory that has previously prompted waves of yen-buying intervention from the Ministry of Finance.

There appears to be a disconnect here. Central bank interest rate hikes and rising bond yields should support the currency, right?

    That logic doesn't always hold, however, especially when Japan's unique debt dynamics and inflation history are taken into consideration.

    WORLD'S MOST CAUTIOUS RATE-HIKING CYCLE

    Japan has amassed the world's largest public debt pile of more than 230% of GDP, thanks to decades of "quantitative easing" bond-buying, borrowing, fiscal largesse, and near-zero interest rates to try to pull the economy out of a prolonged deflationary funk.

    It appears to have won that battle. Annual inflation is running at around 3%, exceeding the Bank of Japan's 2% target every month for nearly five straight years. And wage growth ​has been robust in recent years, ‍even if it is now slowing.

    The Bank of Japan (BOJ) is finally increasing borrowing costs, albeit cautiously. It lifted its policy rate last month to a 30-year high of 0.75% from 0.5%. This is the slowest policy tightening cycle in modern history, with rates increasing just 85 basis points over two years, but it still is confirmation that deflation-haunted Japan may no longer be such an outlier.

    As independent economics commentator Matthew Klein observes: "Far from indicating trouble, Japanese bond prices are implying ​that Japan has converged, in at least one important way, with the rest of the rich world."

    ELEVATED FX VOLATILITY

    That may be true, but for many Japanese businesses, consumers, and investors, the highest interest rates in 30 years represent a step into the unknown. With this comes uncertainty, and therefore a likely increase in expected volatility.

    This helps explain why the recent rise in JGB yields has triggered such an adverse reaction in the yen. Investors appear to fear that historically high borrowing costs could precipitate a fiscal crisis that will only tighten the squeeze on JGBs and the yen.

Yen volatility has already been creeping up in the last few years. Since late 2022, implied three-month dollar/yen volatility has been consistently and often significantly higher than comparable measures in euro/dollar and sterling/dollar.

    It wasn't always thus. For long spells over the past quarter century, yen "vol" was in line with, or lower than, its euro and sterling counterparts.

    But times have changed, and there are plenty of reasons to expect yen "vol" to stay elevated.

    Although "real" inflation-adjusted Japanese rates and yields are still negative, nominal rates are rising, and they could climb further on the back of Prime Minister Sanae Takaichi's plans to prime the pumps. The gap with borrowing costs in the U.S. and other developed markets is ​narrowing, which may spur a yen rebound, especially if it is backed by intervention from Tokyo.

    Japanese authorities have conducted four bouts of yen-buying in recent years: twice in 2022 and another two times in 2024. Traders are on high alert for a fifth.

For the first time in decades, Japan has got inflation, wage growth, and rising borrowing costs. It's a new "normal" that will take some getting used to.

What could move markets tomorrow?

* Germany inflation (December, final) * Bank of England Governor Andrew Bailey speaks * U.S. industrial production (December) * U.S. earnings, including PNC Financial, State Street, M&TBank * U.S. Federal Reserve officials scheduled to speak includeVice Chair Philip Jefferson, Vice Chair for Supervision MichelleBowman, and Boston Fed President Susan CollinsWant to receive ‍Trading Day in your inbox every weekday morning? Sign up for my newsletter here. 

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