For the best part of a generation, Japan was the great exception in global finance — the major economy where interest rates sat at or below zero, where saving paid nothing and borrowing cost almost nothing. That long era of ultra-loose policy shaped not just Japan but the flow of money across Asia and beyond. Its unwinding, as the Bank of Japan has moved policy back into positive territory, is one of the more consequential shifts in regional finance, and its ripples are still spreading.
The world the low rates built
To see why this matters, you have to understand what near-zero Japanese rates created. When borrowing in yen costs almost nothing, investors can borrow cheaply in Japan and put that money to work in higher-yielding assets elsewhere — a strategy known as the carry trade. For years, this sent waves of capital out of Japan in search of better returns, helping to fund assets across Asia and the wider world, and keeping the yen weak.
A persistently weak yen had its own effects: it made Japanese exports more competitive, drew in record numbers of tourists, but also raised the cost of imported energy and goods for Japanese households. The entire structure rested on the assumption that Japanese rates would stay anchored near zero indefinitely.
What changes when rates turn positive
As the Bank of Japan normalises policy and rates move up from their historic lows, that structure begins to shift on several fronts at once.
The carry trade gets less attractive. When borrowing in yen is no longer almost free, the maths behind borrowing cheaply in Japan to invest abroad weakens. That can prompt investors to unwind positions, pulling some capital back towards Japan and reducing the outward flow that helped fund assets elsewhere in the region.
The yen's direction shifts. Higher domestic rates tend to support a currency, and a firmer yen changes the calculus for exporters, tourists and importers alike. Even the expectation of higher rates can move the currency well before the full effect arrives.
Japanese savers gain options at home. Decades of zero returns pushed Japanese institutions and households to seek yield abroad, making Japan one of the world's great exporters of capital. As domestic returns rise, some of that money may find reasons to stay closer to home, a subtle but significant change for markets that grew used to Japanese investment.
Why the ripples reach across Asia
Japan's scale makes it impossible for neighbours to ignore. It is one of the largest sources of cross-border investment in the region, and shifts in the yen and in Japanese capital flows feed into currencies, bond markets and competitiveness across Asia. A stronger yen can ease pressure on other Asian currencies that had struggled against a firm dollar; a reversal of carry-trade flows can tighten financial conditions in markets that had quietly benefited from cheap yen funding.
There is also a competitive dimension. Japanese exporters compete directly with manufacturers elsewhere in Asia, so a meaningful move in the yen reshuffles relative advantage across the region's trade-dependent economies.
The caution: gradual, and carefully managed
It is worth keeping perspective. The Bank of Japan has moved deliberately and cautiously, mindful that decades of low rates have left borrowers, the government and markets adjusted to cheap money. A disorderly or rapid tightening could be disruptive, which is precisely why the shift has been incremental. The direction of travel is clearer than the speed, and much depends on whether inflation and wage growth in Japan prove durable enough to justify continued normalisation.
What to watch
- The yen's trajectory, which transmits Japan's policy into trade and tourism across the region.
- Signs of carry-trade unwinding, which can tighten conditions in markets that relied on cheap yen funding.
- Whether Japanese capital stays home, reshaping flows for a region accustomed to Japanese investment.
For years, analysts treated Japan's zero-rate world as a permanent feature of the landscape. Its gradual end is a reminder that the foundations of Asian finance are not fixed — and that a change in Tokyo's interest rate, however modest it looks on paper, reaches a long way across the region's markets.