Why does the Japanese interest rate move the world?
By José Villalta
Following the real estate and stock market bubble in Japan in the early 1990s, the country fell into crisis due to the collapse of asset values and uncollectible loans from financial institutions. The situation was so critical that it became known as the lost decade. In the late 1990s, the Bank of Japan drastically lowered interest rates to revive the economy, fighting deflation and stagnation.
The birth of the carry trade
With interest rates hovering around 0%, many global investors chose to finance themselves in yen and invest in other assets with higher yields. This strategy is known as the carry trade; the profit comes from the spread between the financing rate and the return on the investment. As a result, the yen became one of the preferred funding currencies, injecting liquidity into markets around the world and increasing risk appetite.
The turn in 2024–2025
After years of fighting deflation, in the final months of 2025 Japan reported inflation above 2%, higher than its target. That pressure led the central bank to raise its interest rate to 0.75% in December. Higher rates help Japan keep inflation under control and strengthen the yen against other currencies, which keeps the price of imported goods from climbing.
The upward trend, however, does not only affect Japan; it has global consequences. Because the yen was investors’ funding currency for years, a rise in rates and an appreciation of the yen increase the cost of repaying those loans.
In August 2024, an adjustment from 0% to 0.25% triggered a significant correction: the Nikkei fell about 12% in a single day. The move set off sales of global risk assets backed by cheap financing, along with volatility across equities, currencies, and bonds.
In December 2025, the Bank of Japan raised rates again, this time by 0.5% — the largest hike in 30 years. The impact was less severe than in 2024, because market expectations had already adjusted and the reaction was more contained, though there were still effects on yields and the currency market.
Why it matters for global portfolios
Japanese monetary policy carries considerable weight in capital markets. A restrictive stance — higher rates — puts downward pressure on risk assets, can prompt a sell-off in bond and cryptocurrency markets, and tends to push U.S. and European bond yields higher.
Japan is expected to raise rates again this year and in 2027. The question is not what will happen, but how those effects will be managed to create value in portfolios.
