The BOJ's decision to raise its policy rate is causing the low-interest-rate environment that has supported the yen carry trade to begin to break down. The development is expected to affect global asset markets, and its future course is drawing attention.
The Bank of Japan raised its policy rate to 1.25%, bringing the long-running era of low interest rates and additional liquidity provision closer to an end. As a result, the market dynamics surrounding the yen carry trade, in which investors borrow yen to invest in overseas assets, are beginning to change.
The yen carry trade expanded against a backdrop of borrowing low-interest-rate yen and investing in higher-yielding assets. With the latest rate hike bringing Japan's policy rate closer to the neutral rate, some observers believe the economics of the trade are beginning to break down.
On the fiscal front, Japan's government debt is reported to exceed 200% of GDP, while population decline and rising energy import costs have been identified as risk factors. Movements in the yen, both its appreciation and depreciation, could also spill over into global markets.
Changes in interest-rate trends could also affect the international context. A phase in which yen liquidity contracts is conceivable through developments in the US administration and currency-market dynamics, raising the risk of spillovers into equity, bond and commodity markets.