Japan's ultra-low interest rates created global financial dependency through the yen carry trade
Source: https://www.theguardian.com/profile/editorial. "The Guardian view on Japan’s hidden century: cheap money, global risk | Editorial | The Guardian." April 5, 2026. www.theguardian.com
The Gist
Japan's super-low interest rates made the yen incredibly cheap to borrow, so global investors borrowed massive amounts to invest elsewhere for higher returns. This created a dangerous situation where any sudden change in Japanese policy could crash global markets, but Japan can't change course because of its own economic problems.
Conclusion
Japan's monetary policy has created a dangerous global financial dependency where the yen carry trade binds international markets to Japanese policy decisions, creating systemic risk
Premises
- The Bank of Japan's ultra-low interest rates turned the yen into the world's cheapest funding currency
- Global investors borrowed $435bn in yen between 2022-2024 to invest in higher-return assets, generating tens of billions in profits
- Any sudden Japanese rate hike would cause global financial shock by shrinking profit spreads and strengthening the yen against borrowers
- Hedge funds involved in carry trades are heavily leveraged, amplifying potential market disruption
- Japan's domestic economic constraints force continued loose monetary policy to manage internal crises
- Japan lacks the macroeconomic conditions for sustainable growth, making policy normalization unlikely
Assumptions
- The Bank of Japan will continue prioritizing domestic economic stability over global financial risks
- Global financial markets have become structurally dependent on cheap yen funding
- Japan's economic problems are structural and cannot be easily resolved
- Leveraged financial positions create systemic risk when unwound rapidly