Could Japans Rate Hike Trigger a Global Market Shock?

Source: Kapitales Research

Highlights:

• Markets are on alert ahead of the Bank of Japan’s June 18–19 meeting, with expectations of a rate hike raising fears of global market volatility.
• The yen carry trade is at the centre of concern, as higher Japanese rates could trigger a sharp unwinding of yen-funded global investments.
• A stronger yen could amplify risks for global equities, particularly US markets, by eroding carry trade returns and pressuring asset prices.

Why investors worldwide are watching the Bank of Japan closely

Global markets are on edge ahead of the Bank of Japan’s closely watched policy meeting on June 18–19, with investors bracing for what could be a historic interest rate increase. According to Société Générale SA (EPA: GLE) strategist Manish Kabra, a more aggressive stance from Japan’s central bank could pose a greater risk to US equities than actions by the US Federal Reserve itself. His warning has reignited debate over whether Japan could become the unexpected source of the next market jolt.

At the time of writing, expectations are building that the Bank of Japan may further tighten policy, ending decades of ultra-loose monetary settings that have shaped global capital flows.

Why the Bank of Japan matters so much

Japan has been the backbone of global low-cost funding for years. With interest rates near zero since the mid-1990s—and even negative between 2016 and early 2024—investors around the world have relied on cheap yen funding to chase higher returns elsewhere. A shift in this policy threatens to disrupt that balance. Analysts warn that a hawkish surprise could send shockwaves across equities, bonds and currencies, particularly in the US, where global capital has been heavily invested.

Understanding the yen carry trade

In simple terms, investors borrow money in Japan at very low interest rates, convert it into higher-yielding currencies such as the US dollar, and invest in assets offering better returns.

This strategy has flourished precisely because Japanese rates were stuck near zero for decades. However, the trade carries a hidden risk: currency movements.

Why exchange rates are the real risk

As Bank of Korea official Yoon Kyung-soo has explained, carry trade profits depend not just on interest rates but also on exchange rates. If the yen strengthens sharply after a rate hike, gains from higher overseas yields can quickly disappear—or turn into losses.

For example, even a modest appreciation in the yen can wipe out returns earned from interest differentials. That’s why markets fear a sudden unwinding of yen-funded positions if Japan tightens

policy faster than expected. With uncertainty high, investors worldwide are holding their breath to see whether Japan’s next move reshapes global markets—or simply delivers a controlled adjustment.

Disclaimer for Kapitales Research

The materials provided by Kapitales Research, including articles, news, data, reports, opinions, images, charts, and videos ("Content"), are intended for personal, non-commercial use only. The primary goal of this Content is to educate and inform readers. This Content is not meant to offer financial advice, nor does it include any recommendation or opinion that should be relied upon for making financial decisions. Certain Content on this platform may be sponsored or unsponsored, but it does not serve as a solicitation or endorsement to buy, sell, or hold any securities, nor does it encourage any specific investment activities. Kapitales Research is not authorized to provide investment advice, and we strongly advise users to seek guidance from a qualified financial professional, such as a financial advisor or stockbroker, before making any investment choices. Kapitales Research disclaims all liability for any direct, indirect, incidental, or consequential damages arising from the use of the Content, which is provided without any warranties. The opinions expressed by contributors or guests are their own and do not necessarily reflect the views of Kapitales Research. Media such as images or music used on this platform are either owned by Kapitales Research, sourced through paid subscriptions, or believed to be in the public domain. We have made reasonable efforts to credit sources where appropriate. Kapitales Research does not claim ownership of any third-party media unless explicitly stated otherwise.

Customer Notice:

Nextgen Global Services Pty Ltd trading as Kapitales Research (ABN 89 652 632 561) is a Corporate Authorised Representative (CAR No. 1293674) of Enva Australia Pty Ltd (AFSL 424494). The information contained in this website is general information only. Any advice is general advice only. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of this product for your circumstances. Please be aware that all trading activity is subject to both profit & loss and may not be suitable for you. The past performance of this product is not and should not be taken as an indication of future performance.

Kapitales Research, Level 13, Suite 1A, 465 Victoria Ave, Chatswood, NSW 2067, Australia | 1800 005 780 | info@kapitales.com.au