The Great Unraveling: Why Japan’s Policy Shift Is Sending Shockwaves Through Global Markets, and Investors Are Racing to Gold
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After decades of defying economic gravity, Japan is finally changing course. And the world is watching with a mixture of anticipation and alarm.
In December 2025, the Bank of Japan raised its benchmark rate to 0.75% a seemingly modest figure that masks a seismic shift in global finance.
For years, Japan’s ultra-loose monetary policy has been a cornerstone of the international financial system, fueling everything from currency trades to bond markets across continents. Now, that foundation is cracking. The immediate effects are already visible: Japanese Government Bonds are experiencing unprecedented volatility. The Yen is strengthening rapidly, upending decades of predictable weakness. And perhaps most tellingly, investors worldwide are fleeing to the ancient refuges of gold and silver as traditional financial instruments suddenly seem far less stable.
The Yen Carry Trade: Cheap Money Goes Global
Why is it related?
At the heart of Japan’s influence lies the yen carry trade, one of the most profitable strategies in modern finance. With interest rates near or below zero since the late 1990s, investors could borrow yen at virtually no cost, convert it to other currencies, and invest in higher-yielding assets worldwide from U.S. corporate bonds to emerging market stocks to real estate in Sydney or London.
This wasn’t a niche strategy. Trillions of dollars flowed through this mechanism, effectively making Japan’s central bank an unwitting financier of global growth. Hedge funds, pension funds, and major banks all participated, creating a massive web of interconnected positions built on the assumption that Japanese rates would remain perpetually low.
But this isn’t just a Japanese story.
The unwinding of the Yen carry trade, where investors borrowed cheaply in Yen to invest in higher-yielding assets elsewhere, is reverberating through global bond markets, stock exchanges, and currency desks from New York to Frankfurt. What happens when the world’s third-largest economy stops being the lender of last resort?
For business leaders and investors, the question isn’t whether Japan’s normalization will affect your portfolio or strategy; it’s how deeply, and how soon.
As the BoJ retreats from its massive market presence and fiscal concerns mount alongside new government stimulus plans, we’re witnessing a fundamental recalibration of global capital flows. The panic may be premature, but the transformation is real. And in times of transformation, those who understand the underlying currents don’t just survive, they position themselves to thrive.
I. History and the Strategic Decision: From Keynes to Kuroda
Yield curve control is not a modern invention but a tool of financial repression historically deployed during crises. In 1933, J.M. Keynes proposed that the Federal Reserve reduce long-term interest rates by purchasing long-dated government bonds to combat the Great Depression. The strategy was later utilized by the U.S. and the U.K. during and after World War II to curb government financing expenses and prevent explosive debt accumulation.
In the modern era, the Bank of Japan adopted “QQE with Yield Curve Control” in September 2016. This decision was born out of a “patchwork” modification to the original Quantitative and Qualitative Monetary Easing (QQE) framework. After 1995, Japan faced a 25-year struggle with the effective lower bound of interest rates, and the 2016 shift to YCC aimed to target a 10-year JGB yield of “around zero percent” to restore market sentiment and reach a 2% price stability target.
II. The Effects of Near-Zero Bonds: Stability vs. Market Distortion
Initially, YCC allowed the BOJ to exert close control over the term structure of interest rates without requiring constant large-scale market interventions. This created a “stealth tapering” effect; by committing to buy whatever was necessary to keep yields at zero, the BOJ actually reduced the volume of its bond purchases as the target became credible to investors.
However, this stability came at a significant cost to market efficiency:
- Liquidity Erosion: The BOJ eventually held nearly 40% (and later significantly more) of the JGB market, which deteriorated market functioning and discouraged private dealer participation.
- Arbitrage Breakdown: Intense interventions amplified fluctuations in the overall yield curve while capping the 10-year yield, creating “dips” and distortions where market forces were suppressed.
- Financial Repression: Banks and insurance companies saw lending margins compressed, undermining their financial strength as long-term rates stayed near or below zero.
III. Why Policy Changed: The Virtuous Cycle of Wages and Prices
In March 2024, the BOJ ended its eight-year era of negative interest rates, raising short-term rates to 0 0.1%. This fundamental change was driven by two primary factors:
- Sustainable Inflation: Japan’s inflation rate finally soared beyond the 2% target, peaking at 4.3% in January 2023. The Wage-Price Momentum:
- Annual spring wage negotiations resulted in average wage increases of 3.7% to 5.1%, the highest in decades. The BOJ confirmed a “virtuous cycle” between wages and prices, which was an indispensable condition for exiting ultra-loose policy.
IV. Implications for the Dollar and Foreign Exchange (FX)
Historically, YCC and low yields encouraged Japanese investors to seek higher returns overseas, leading to a gradual depreciation of the Yen. By October 2022, the Yen hit a 24-year low against the Dollar as the Federal Reserve hiked rates while the BOJ remained anchored at zero.
The March 2024 exit produced a paradoxical effect: the Yen depreciated further, reaching its lowest level since the 1990s against the dollar. This occurred because the BOJ’s messaging remained “cautious” and “accommodative,” signaling that a new cycle of aggressive rate hikes was not imminent. This demonstrates that FX movements are currently dictated more by the relative policy paths of the Fed and ECB than by the symbolic end of negative rates in Japan.
V. Impact on Global Bonds, Startups, and SMEs
The normalization of JGB yields creates a “feedback loop” that affects the global cost of debt.
Global Bonds: Japan is the world’s largest creditor and top foreign holder of U.S. government debt, holding $1.1 trillion in Treasuries. As domestic JGB yields rise, Japanese institutional investors may repatriate capital, potentially triggering a funding crisis or “spike” in U.S. Treasury yields as demand from this major buyer diminishes.
SMEs: While large manufacturers benefited from a weak Yen, small- and medium-sized enterprises (SMEs) struggled with high import costs for food and energy. The shift toward a stronger Yen (long-term) could reduce these import costs but may depress export values for those who recently globalized.
Startups and Investors: Investors engaged in “carry trades” borrowing cheap Yen to invest in higher-yielding assets must now be cautious. Future rate hikes increase repayment costs, potentially forcing a rapid unwinding of leveraged positions across risk assets.
VI. Future Scenarios: Capital Flows and a Multi-Polar Economy
For strategy teams, two scenarios emerge regarding the $7 trillion in Japanese institutional savings:
- Orderly Repatriation: If the BOJ continues a “gradual” normalization, Japanese yields will stay elevated, encouraging domestic investors to “stay home,” which reduces global risk over time.
- Disorderly Market Break: If political uncertainty or a “snap election” leads to policy paralysis, JGB markets could see unprecedented volatility. A sudden lurch in yields could force a “forced unwind” of global carry trades, cascading through emerging markets and commodity currencies.
The global economy is moving toward a multi-polar monetary system where the “exorbitant privilege” of the dollar is challenged by the development of alternative payment systems and a structural decline in demand for U.S. debt. Business leaders must hedge against currency volatility and prepare for a long-term increase in the global cost of capital as Japan’s “fountain of cheap money” finally dries up.
References:
https://libertystreeteconomics.newyorkfed.org/2020/06/japans-experience-with-yield-curve-control/
What Did the Yield Curve Control Policy Do? by Shigenori Shiratsuka
https://www.weforum.org/stories/2024/03/japan-ends-negative-interest-rates-economy-monetary-policy/
https://europeanbusinessmagazine.com/business/japans-7-trillion-bond-market-selloff-sends-shockwaves-through-global-markets/
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