Japan’s Monetary Policy Tightens
Japan’s central bank has increased its main interest rate to a new 31-year high
On Tuesday, the Bank of Japan (BOJ) raised its so-called policy rate to 1% from 0.75% — a level not seen since 1995.
The decision comes as some other central banks have raised interest rates this year as the US-Israel war with Iran pushed up the cost of living.
Japan’s interest rates were cut aggressively in the 1990s to combat the fallout from a collapse in prices of assets like property and shares. They had been near zero for two decades as prices fell and growth stagnated.
This Is Exactly What We Predicted in October 2025
In our October 29, 2025 Substack post, MacroXX wrote:
“Japan’s economy itself is experiencing a pivotal moment after years of deflation and stagnation. Moderate inflation around 2-2.5%, rising wages, ongoing corporate governance reforms, and strong fiscal policies are helping to revive growth.”
The BOJ’s move to 1% — the highest since 1995 — is the proof that Japan has successfully exited its deflationary era. This isn’t just a rate hike; it’s a monetary normalization that validates the economic turnaround we’ve been tracking.
The Real Risk: What Happens Outside Japan Is What Matters
This is the critical insight most investors miss: The real story isn’t what happens inside Japan. The real story is what happens outside Japan.
Japan stands as one of the world's largest creditors, with Japanese investors collectively holding trillions of dollars in foreign assets. Their portfolio spans US Treasuries, European bonds, corporate debt, stocks, private equity, infrastructure projects, and virtually every major asset class imaginable.
Why? Because returns in Japan were so low for so long that it was more lucrative to invest money elsewhere. When domestic government bonds yielded close to zero, investors naturally looked to US Treasuries paying 4-5%.
Now that process could reverse.
Asset Repatriation: Japanese Money Coming Home
Here’s what’s happening:
Japanese investors are already bringing money home (they’ve started)
Japanese government bond yields are rising — making domestic investments attractive again
No need for currency risk or hedging costs when you can earn attractive returns domestically
The result: Japanese insurance companies, pension funds, and institutional investors sell foreign assets and repatriate capital.
Japan holds the largest amount of foreign assets globally, with a net international investment position surpassing $4 trillion. Even a small shift in those assets could trigger significant consequences across global markets.
Even a small percentage of $4 trillion = hundreds of billions flowing back to Japan.
Why the US Is Particularly Vulnerable
Japan has been among the largest foreign holders of US Treasuries for decades, helping finance America’s deficits.
What happens if Japanese investors start selling?
If Japanese investors begin selling their U.S. Treasury holdings, the consequences could ripple widely: Treasury yields would rise, pushing up U.S. government borrowing costs. Mortgage rates would increase, making home buying more expensive. Corporate financing would become costlier, slowing business investment. As financial conditions tighten, economic growth would face mounting pressure.
The United States is running huge budget deficits and must constantly sell Treasury securities to operate. If foreigners stop buying U.S. debt, American investors will have to step up and buy more of it themselves.
The irony: Many investors focus on the Federal Reserve, but one of the biggest risks to US borrowing costs may come from decisions made thousands of miles away in Tokyo.
The Yen Carry Trade: The Most Dangerous Piece of the Puzzle
For years, the yen carry trade was the most popular strategy in global finance:
Borrow money in Japanese yen at extremely low rates
Convert to dollars or other currencies
Invest in higher-yielding assets
Pocket the difference
Hedge funds, banks, corporations, and asset managers all used it. As long as the yen remained stable or weakened, the trade generated attractive returns.
But BOJ rate hikes change everything:
As Japanese interest rates rise, borrowing costs increase for those who borrowed in yen. At the same time, if the yen strengthens, investors face currency losses when converting back to their home currency. This transforms what was once a safe and profitable trade into a dangerous, risky position.
When carry trades unwind, they unwind violently:
When everyone tries to exit simultaneously, liquidity vanishes. Investors sell whatever they can quickly — they aren't looking to profit, they just want to dump those assets. This leads to falling stock prices, bond sell-offs, and rising market volatility.
This could:
Shake US bond markets
Pressure stock markets around the world
Expose how dependent the global financial system has become on cheap Japanese money
Why This Confirms Our Bond Market Thesis
As we’ve said repeatedly: the bond market is what rules the financial world.
Japan’s move to 1% — a 31-year high — proves this:
Inflation is real and persistent — not a temporary spike
The BOJ is finally normalizing — after 20+ years of near-zero rates
Japanese yields will rise — triggering capital flows into Japanese bonds and global asset repricing
The yen strengthens — changing currency dynamics for global investors
This is the bond market setting the tone for the entire global financial system.
Should You Invest in Japan? The Answer Is Even More Positive Now
We originally recommended iShares MSCI Japan ETF (EWJ) as a diversified vehicle to participate in Japan’s macroeconomic and geopolitical shifts.
As of late October 2025 (our original analysis):
Price: ~$83.23
P/E Ratio: ~17.9
Expense Ratio: 0.50%
Dividend Yield: ~2%
YTD Return: ~21.7%
Today’s implications:
The BOJ’s rate hike validates Japan’s economic recovery, making EWJ even more attractive
Rising yields support the yen, which can boost foreign investor returns
Corporate governance reforms + rising wages + inflation = sustained equity momentum
Key Risks to Monitor
We still caution investors to consider:
Regional geopolitical tensions (U.S.-China competition, Middle East war)
Domestic structural challenges (labor shortages, aging population)
Currency volatility (yen strength could hurt exporters)
Global financial turbulence from yen carry trade unwind
This post is educational and informational purposes only and does not constitute investment advice.