The Guardian View on Japan’s Hidden Century: Cheap Money, Global Risk | Editorial

Why It Matters

Global investors rely on cheap yen financing; any abrupt BoJ policy shift could trigger widespread market volatility and affect debt servicing worldwide.

Key Takeaways

• BoJ's ultra‑low rates make yen cheapest global funding
• Yen carry trade reached $435 bn in two years
• March 2024 rate hike barely slowed carry trade activity
• Sudden BoJ tightening could trigger worldwide financial shock
• Japan's weak wage growth limits productive economic resurgence

Pulse Analysis

The yen’s status as the globe’s most affordable source of capital stems from the Bank of Japan’s decades‑long commitment to near‑zero interest rates and yield suppression. By keeping government bond yields artificially low, the BoJ created a public subsidy that banks and hedge funds exploit through the classic "yen carry trade": borrowing cheap yen and investing in higher‑yielding assets, notably U.S. equities. The scale of this activity is staggering—about $435 billion of positions have been built in the two years following the pandemic, a figure that dwarfs previous post‑crisis carry‑trade volumes and underscores the yen’s pivotal role in global liquidity.

The market’s anxiety centers on the prospect of a rapid policy pivot. While the BoJ delivered its first rate increase since 2007 in March 2024, the move was modest and failed to curb the appetite for yen‑funded bets. Analysts warn that a more aggressive tightening—especially if unannounced—could compress the spread between Japanese and foreign assets, eroding profits for leveraged investors and forcing borrowers to refinance with a stronger yen, thereby increasing dollar‑denominated debt burdens. Such dynamics have already rattled currency markets, and a sudden shock could cascade into equity sell‑offs and heightened volatility across risk‑on assets.

Beyond the financial mechanics, Japan’s broader economic picture remains fragile. Real‑wage growth has only just emerged after years of stagnation, and the country’s exchange‑rate and profit margins remain constrained. Prime Minister Sanae Takaichi’s reflationist agenda, which leans on fiscal expansion, may stabilize demand but does not resolve structural issues in wage‑setting or productivity. Consequently, Japan’s "century" is defined more by its role as a source of cheap capital than by robust domestic growth, leaving policymakers to balance external financial influence against the need for genuine economic revitalisation.