It is better for the Bank of Japan not to attract attention and remain as quiet as the forest in a rural shrine.
–Hisato Ichimada, the 18th Governor of the Bank of Japan, 1946-19541
For three decades, Japan supplied some of the cheapest money on earth. Investors borrowed Japanese yen at rates close to zero, then put that money into assets offering higher returns elsewhere: US technology shares, Treasuries, real estate, private credit, crypto, you name it.
Why?
Well, think of it this way. If you could borrow anywhere, say on a credit card, at 0% (no fees, of course) and put that money into something, say, a savings account paying 5%, wouldn’t you borrow as much as possible to do so?
But what if you weren’t earning 5%, but something much higher—or something perceived to be higher? Yes, there’s a bit of risk involved, but there’s potentially a lot of money to be made. And even though you have to pay back the loan, it is, after all, at zero percent. If one is the loneliest number, then surely, in borrowing, zero is the best number.
Even though it sounds sort of ridiculous, this is what many investors effectively did for decades.2
However, on 18 September 2026, the Bank of Japan raised its policy rate to 1.25%—paltry by many standards, but the highest level in Japan since 1995.3 Additionally, Japan’s 10-year government bond yield has risen to roughly 3.1%, a level last seen in 1996.4
Those may look like Japanese milestones. But they also change the math for many investors around the world.
As it becomes more expensive to borrow yen, the trade behind all of that borrowing loses some appeal. Investors who used cheap yen to buy assets elsewhere now face higher interest costs. A stronger yen also makes those loans more expensive to repay. Investors may try to sell assets, repay their loans, and make for the exit.
That dynamic becomes especially dangerous when the trade is crowded: as the yen strengthens, investors may rush to unwind similar positions at the same time, amplifying losses across markets. So much for borrowing at low rates when your asset prices decline at a far higher rate.
Yet, like most things, history didn’t start yesterday. We think we saw a preview of this in August 2024. A relatively modest Bank of Japan rate increase came alongside a sharp rise in the yen. Investors reduced positions funded with borrowed yen, and Japan’s stock market dropped around 12% in one day—its steepest fall since 1987 (not a forecast of future returns, just a historical fact).5
While global markets recovered within weeks, the initial declines weren’t confined to Japanese markets, and the entire episode still showed how pervasive cheap Japanese funding had become.
Yeah, yeah. That’s fine. But who cares about any of this? How could this impact portfolios going forward?
Well, theoretically, higher interest rates can change the calculus of how investors value companies. For example, a company may keep growing revenue, adding customers, and earning profits. Yet, higher rates may change what investors are willing to pay today for earnings expected years from now. That’s not always the case, but it is a risk for highly valued companies whose expected earnings growth may wobble.
Japan’s pension funds and insurers add another angle. For years, near-zero yields at home sent them searching abroad for yield, including in US Treasuries. Higher Japanese bond yields today give them a better reason to keep capital closer to home. If fewer Japanese investors buy US Treasuries, Treasury yields may need to rise to attract other buyers. Higher Treasury yields can then feed into borrowing costs for governments, companies, and households, including mortgages and auto loans. Everyone gets a copy of that bill. We wrote about a variant of this a few weeks back.
The more practical question is where an unwind could show up first: assets that are easy to sell, richly valued, and especially sensitive to interest rates. That includes unprofitable growth companies, long-maturity bonds, real estate investment trusts, private credit, crypto, leveraged investments, and the list goes on and on.
Japan spent decades exporting cheap money. With its rates rising and the gravy train coming to an end, the rest of the world may soon get a clearer look at just how much of its risk-taking was financed not in its own currency but in Japan’s yen.
Until next time.
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What We’re Watching
This week, we’re watching the documentary based on Richard Werner’s very-hard-to-find book, Princes of the Yen: Central Banks and the Transformation of the Economy.
END NOTES
1Komlik, Oleg. “Princes of the Yen and the Japanese Shock Doctrine.” Economic Sociology. 5 July 2016.
2Ranganathan, Vidya. “Explainer: What is the Yen Carry Trade?” Reuters. 7 August 2024.
3Hui Jie, Lim. “Bank of Japan Raises Interest Rates to 31-Year High, Flags Concerns Over Inflation.” CNBC. 17 September 2026.
4Buckland, Kevin and Rocky Swift. “Japan’s Benchmark Bond Yield Rises to 3% for First Time in 30 Years.” Reuters. 1 September 2026.
5Mio Inuma, Julia and Michelle Ye Hee Lee. “Why Has the Japanese Stock Market Been on a Roller-Coaster Ride?” The Washington Post. 6 August 2024.
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