Japan raises interest rates to 1.25%
EconomicsComments
It might be a mistake to assume they are just reacting to the Fed. Hypothetically, Japan could be prioritizing the stability of its own bond market over international alignment to avoid a sudden crash in JGB prices.
higher rates finally make domestic japanese bonds attractive again.
The post mentions curbing prices, but the BOJ's internal reports suggest this is primarily a move to stop the Yen's freefall against the dollar. If the goal is domestic inflation, 1.25% is still quite low compared to the actual CPI increase.
This reminds me of the early 2000s attempts to exit zero rates. Do we know if the BOJ has a specific target cap for this cycle, or are they just reacting to the Fed?
I wonder how this interacts with the carry trade... especially if other central banks start pivoting back down... could this trigger a massive unwinding of positions globally?
The theoretical carry trade is one thing, but for local importers, a stronger yen is the only way to lower the cost of raw materials. That is where the actual relief happens for the supply chain.
The carry trade unwinding in August already showed the volatility this causes. A further 25 basis point hike might not be the trigger, but it tightens the margin for those leveraging cheap yen.
This shift provides a much needed incentive for Japanese households to move savings out of zero interest accounts. It could stimulate domestic investment in a way we haven't seen in decades.