- Nobu Watanabe, a former Bank of Japan (BOJ) official and professor at the University of Tokyo, recently warned that due to the input inflation pressure caused by the continued sharp depreciation of the yen, the BOJ may be forced to accelerate the pace of monetary policy tightening this year, potentially raising the policy interest rate to over 2%. This statement highlights the deep dilemma faced by monetary authorities after exiting the negative interest rate policy, where a single policy adjustment is unlikely to effectively reverse the weak performance of the domestic currency.
- Since 2021, the yen has depreciated by about 40% against the US dollar, with a further decline of nearly 13% this year, reaching a historic low of 161.86. Driven by this expectation, the yield on Japan's ten-year government bonds has risen to over 1.0%, a twelve-year high, indicating that financial markets are rapidly repricing the potential path of aggressive rate hikes by the central bank.
- As Japan's interest rates face significant upward potential, the yen carry trade, long relied upon by global markets, is facing severe unwinding risks. If a large amount of low-cost yen borrowed for investment in overseas tech stocks, foreign bonds, or gold returns, the global multi-asset allocation structure will face structural shocks, and its spillover effects may lead to a marginal tightening of global financial market liquidity.
Input Inflation Intensifies Policy Shift Pressure
The continued weakness of the yen is significantly raising Japan's import costs in energy, food, and raw materials, posing a risk of sustained erosion of domestic consumer purchasing power. If the transmission rate of input inflation exceeds expectations, the BOJ may have to abandon its original gradual monetary policy adjustment path. This marginal repricing of policy will directly drive cross-border capital restructuring, prompting some interest rate arbitrage funds to start returning early, thereby exerting phased selling pressure on globally overvalued risk assets.
Interest Rate Double-Edged Sword Squeezes Fiscal and Corporate Profits
If Japan's policy interest rate eventually breaks through the core threshold of 2%, the long-standing era of cheap funds will come to an end, profoundly impacting the domestic real economy. The financing costs and debt rollover pressure on the corporate sector will rise significantly, especially for the real estate industry and small to medium-sized manufacturing enterprises that are highly sensitive to interest rates. Meanwhile, Japan's government bond interest expenses will increase sharply, potentially forcing fiscal policy to make tough trade-offs between cutting public spending and structural tax increases.
Carry Trade Unwinding Risk Threatens Global Liquidity
The yen, as a major low-cost financing currency globally, has long supported a vast chain of cross-border interest rate arbitrage trades. If the BOJ takes aggressive rate hikes due to excessive currency depreciation, the narrowing US-Japan interest rate differential will severely squeeze the profit margins of carry trades. This could trigger concentrated liquidation of major global stock indices and short-term bond assets, with funds accelerating back to the yen, pushing up the currency exchange rate and causing a resonant tightening of cross-asset liquidity worldwide.
Cross-Asset Correlation Reshaping Spurs Safe-Haven Demand
Recently, the traditional linkage correlation between the foreign exchange market and commodities like gold has diverged, indicating that some market institutions are preemptively testing the potential impact of carry trade thawing. If the US-Japan exchange rate experiences a sharp decline in the short term and rising Japanese interest rates trigger global market turmoil, the risk appetite for traditional risk assets will significantly decrease. In this macroeconomic context, assets with strong safe-haven attributes may attract safe-haven inflows, while the pricing logic of highly volatile digital assets will face an unprecedented liquidity test.
