Why You Should Care About the Bank of Japan -- WSJ

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Dow Jones NewsDec 19, 3:29 AM UTC
DJ Why You Should Care About the Bank of Japan -- WSJ

By Jason Douglas

 

TOKYO -- In 1995, O.J. Simpson was acquitted of murder charges, Coolio's "Gangsta's Paradise" topped the charts, and the first Toy Story movie hit the theaters. It was also the last time the Bank of Japan's benchmark interest rate was as high as 0.75%.

 

The BOJ raised its policy rate target to its highest level in 30 years on Friday, another small step back from the world's longest and biggest experiment with ultra-expansionary monetary policy.

 

U.S. investors in stocks, bonds, cryptocurrencies and other assets tend not to pay too much attention to the policy moves of other countries' central banks. But the BOJ is different. If the central bankers in Tokyo continue to slowly raise interest rates, the impact could be felt far and wide -- including in the U.S.

 

"I don't think we can entirely treat this as a Japan-only event," said Frederic Neumann, chief Asia economist for HSBC in Hong Kong.

 

The central bank's rate-setting panel agreed to lift the target rate to 0.75% from 0.5% previously, where it had been held since January. BOJ officials raised their policy rate target in response to sticky inflation, which is still a painful novelty for households in a country that was battling flat or falling prices for decades.

 

The U.S. Federal Reserve, by contrast, cut its benchmark rate this month, and Fed officials are debating whether to do so again in the coming months as the labor market shows signs of softening.

 

Fed decisions on rates routinely ripple globally thanks to the central role of the dollar in finance and trade and the importance of U.S. consumption to the global economy.

 

There are reasons why BOJ decisions are felt beyond Japan's shores, too.

 

One is that ultralow interest rates in Japan have long made the yen an attractive currency for hedge funds and other sophisticated investors to borrow to finance purchases of higher-yielding assets, including Treasurys or U.S. stocks.

 

Rising rates in Japan, which would tend to lead to a strengthening currency, make that so-called carry trade less attractive. In extreme cases, investors might be forced to sell stocks, bonds and other assets to repay their yen-denominated loans, destabilizing markets and driving down prices.

 

Sporadic bouts of such carry-trade-driven volatility aren't unusual. Notable instances were during the financial crisis of 2008-09 and more recently in summer 2024, when weak labor-market data in the U.S. caused a stock selloff that put pressure on leveraged carry trades.

 

Such episodes tend to be short-lived, and the BOJ had been careful to telegraph its latest move. Most economists expect it to proceed cautiously with any further rate increases.

 

A longer-term concern is around the behavior of Japanese investors when their home central bank is gently raising rates.

 

Years of ultralow interest rates encouraged Japanese pension funds, insurers and even mom-and-pop stock pickers to seek better returns overseas in U.S. Treasurys, stocks and similar assets in Europe and Asia.

 

Since rising rates in Japan make Japanese assets relatively more attractive to domestic savers than foreign assets, they might be tempted to sell their overseas holdings and bring their money back home.

 

That could hurt currencies such as the dollar, pinch stock prices and push up borrowing costs for governments, businesses and households, including in the U.S. Yields on government bonds rise when their prices fall, affecting the rates facing everyday borrowers.

 

To be sure, Japanese policy is hardly the only thing that affects bond yields. Other, even bigger drivers include inflation and investors' views on growth prospects and government spending.

 

Still, look ahead two or three years, said HSBC's Neumann, and if short-term Japanese interest rates rise to 1% or 2%, then that will have a "gradual but perceptible" effect on global borrowing costs as Japanese investors pare back their holdings of other governments' bonds.

 

For now, at least, a weak yen and other data suggest Japanese investors are still plowing money overseas. In the year through November, Japanese investors bought a net $102 billion of overseas securities such as stocks and bonds, according to Japanese Ministry of Finance data, versus the net $4.4 billion purchased in 2024.

 

And although the BOJ is tightening policy now, it is unclear how high Japanese interest rates will go. The economy is already in danger of losing momentum, said Stefan Angrick, head of Japan and frontier economics at Moody's Analytics in Tokyo.

 

"It will be hard for them to go much further from here," he said.

 

Write to Jason Douglas at [e-mail]

(END) Dow Jones Newswires

 

December 18, 2025 22:29 ET (03:29 GMT)

 
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