This is Japan acknowledging something it hasn’t been able to say for most of the last 30 years which is wages are rising, companies are actually passing costs through, and inflation looks stickier than a temporary FX or energy shock. When you finally get a real wage price loop, staying at emergency era rates starts to create more risk than moving away from them. The BoJ is choosing to normalize carefully now, while it still has control, rather than wait until the yen or inflation expectations force its hand.

The yen tells you how fragile that confidence still is. Sitting around 157, it’s basically the market saying, “We hear you, but one hike doesn’t fix rate differentials or Japan’s fiscal math.” That’s why you also hear government officials stressing debt service, the neutral rate, and the need to watch the outlook. They’re not contradicting the BoJ, they’re quietly reminding everyone that normalization has limits.

Why This Matters Outside Japan

The immediate impact isn’t about Japan slowing its own economy. It’s about funding. The yen has been the world’s cheapest source of leverage for years, and Japan has been a steady buyer of global bonds. When rates rise, even modestly, that cushion thins. Carry trades get less forgiving, hedging costs go up, and global markets get choppier especially in FX and rates.

The next layer is more subtle. Higher Japanese yields and higher hedging costs can keep U.S. and European long rates from falling much, even as growth weakens. That’s a form of tightening that doesn’t come from the Fed, but it still hits credit, refinancing, and risk assets. You tend to see the stress show up first in levered credit, emerging markets, and long duration trades that depend on calm funding conditions.

If the World Slips Into Recession

This is where the setup gets uncomfortable. In a real risk off move, the yen doesn’t stay a funding currency, it often flips into a safe haven. When that happens, carry trades don’t unwind slowly; they snap. The BoJ might pause later if growth cracks, but the bigger change doesn’t go away…Japan is no longer a permanent zero rate anchor, and global leverage has to adjust to that reality.

What I’m Watching

I’m less focused on the first reaction and more on the follow through. Does USDJPY keep drifting, or does it start to move with volatility? Do hedging costs and cross currency basis tighten? How do JGB 10s and 30s behave, and does the government quietly adjust issuance to calm the long end? And most importantly, do credit spreads start to widen as rates stay sticky while growth fades?

That’s where you find out whether this was just a symbolic step or the beginning of a real shift in the global funding backdrop.