For eight years, Japan ran an experiment no other major economy was willing to try: negative interest rates. Borrowers were effectively paid to take out loans, all in an attempt to shake a economy that had spent decades stuck in weak growth and falling prices. This week, the last chapter of that era moved further into the rearview mirror — the Bank of Japan raised its benchmark rate to 1.25%, the highest it's been since 1995.
How Japan got here
The climb has been gradual by design. The BOJ ended negative rates in March 2024 after eight years, its first hike in 17 years, moving to a range of 0–0.1%. From there it raised again in July 2024, then in January and December of 2025, before crossing the symbolic 1% line this past June. This week's move to 1.25% passed by a 7–2 vote — not unanimous, a sign that even within the BOJ, opinion is split on how fast to keep going.
Why now
The immediate trigger is the same one showing up in inflation data worldwide: oil. Escalating tensions in the Middle East have pushed crude prices sharply higher this year, and Japan — a country that imports nearly all of its energy — feels that kind of shock faster and harder than most. Rising import costs feed directly into inflation, and the BOJ's mandate, like every major central bank's, is to keep that in check. Raising rates is the tool available to do it, even if it comes with trade-offs for a economy still not fully confident in its own growth.
The carry trade problem
Here's the part that reaches far past Japan's borders. For most of the last two decades, Japan's near-zero rates made the yen the cheapest major currency in the world to borrow. Investors everywhere — hedge funds, banks, corporations — routinely borrowed yen at rock-bottom cost and used it to invest in higher-yielding assets elsewhere, from U.S. tech stocks to emerging-market bonds. This is known as the yen carry trade, and it's been one of the quiet engines of global capital flows for years.
Every time the BOJ raises rates, that trade gets a little more expensive to hold, and a little riskier to keep running. When enough investors decide to unwind those positions at once — selling foreign assets to repay yen loans — it can shake markets well outside Japan, even ones that have nothing directly to do with Japanese monetary policy.
A rate decision in Tokyo can move a portfolio in Toronto, not because of anything happening in Canada, but because of how much of the world's cheap borrowing has quietly run through the yen.
The puzzle: a weaker yen despite higher rates
Normally, raising rates makes a currency more attractive and pushes its value up. Japan's yen hasn't been cooperating with that logic — it's continued sliding even as the BOJ hikes. Part of the explanation is relative: other major central banks, including the Fed, have also been raising rates this year, so the gap between Japanese and foreign yields hasn't closed as much as the headlines suggest. Part of it is structural: as an energy importer paying sharply higher oil bills, Japan is sending more yen abroad to pay for crude, which weighs on the currency regardless of what the BOJ does with rates.
What it means beyond Japan
You don't need to hold a single yen to feel the second-order effects. A less accommodating Bank of Japan means one of the world's largest sources of cheap capital is slowly closing, which can tighten financial conditions globally, not just domestically. Combined with the Fed's own rate hike this month, the picture is unusually consistent across major economies right now: central banks are prioritizing inflation control over growth, even at the cost of higher borrowing costs everywhere at once.