Bank of Japan Hikes to 1.25%, Its Highest Rate Since 1995

The Bank of Japan raised rates on Friday. So why should anyone outside Tokyo care?

Because Japan just closed the book on three decades of free money, and the unwind won't stay contained to Japanese shores.

The Numbers

The BOJ lifted its benchmark rate to 1.25%. That's the highest level since 1995. Not since the peak of the Japanese asset bubble has money cost this much in Tokyo.

The vote wasn't unanimous. The board split 7-2, with Toichiro Asada and Ayano Sato dissenting. Markets had priced the move almost entirely before the meeting ended, which tells you something. This wasn't a surprise. It was a confirmation.

The numbers tell the story. Japan spent roughly 30 years at zero, then below zero, then pinned to a yield curve target. Now it's at 1.25% and climbing.

And Japan isn't alone. The Fed and the ECB have already moved. The BOJ is the last of the big three to join.

Why Now

Here's what matters. The energy shock tied to the war in Iran is bleeding into every import-dependent economy, and Japan imports nearly all of its energy. That's a tax on growth that shows up in CPI before it shows up anywhere else.

For decades Japan was the world's cheapest funding source. Borrow in yen, buy anything yielding more, pocket the spread. That trade, the carry trade, kept a lid on global yields and inflated risk assets everywhere.

That era is over. From a risk perspective, the unwind of yen-funded positions is the most underappreciated macro force in markets right now.

What the Street Is Watching

Traders are watching the yen. They're watching long-end Japanese government bond yields. And they're watching whether the carry trade unwinds in a straight line or in violent chunks.

According to positioning data, the market came into this meeting already short yen and long risk. That's a crowded setup. When crowded trades unwind, they don't do it politely.

What the street is missing: nobody's pricing the second-order effects. A stronger yen pressures Japanese exporters. A weaker dollar feeds into US import prices. And every basis point higher in JGBs makes domestic bonds more attractive to Japanese institutions that spent a decade reaching for yield abroad.

What's Next

Watch the next BOJ meeting. If inflation data between now and then stays hot, another hike is live. Watch the 10-year JGB yield, which is the cleanest read on how fast the market thinks policymakers will move.

Also watch US equities. If the yen carry trade starts unwinding, it won't stay in Tokyo. August 2024 was the preview. This time the rate differential is smaller, but the positioning is still heavy.

The reality is this. Japan just told the world that free money is finished. That's not a Japan story. That's a global story. And frankly, most portfolios aren't positioned for it.