For much of the past generation, Japan stood apart from other major economies by keeping interest rates extraordinarily low, at times below zero. Understanding why — and why change is so careful — helps explain moves in global markets.
Why rates stayed so low
After its asset bubble burst in the early 1990s, Japan battled long stretches of falling or flat prices. Low rates and large-scale bond buying were meant to encourage spending and nudge inflation up toward a stable target.
What changes when rates rise
As the central bank edges away from ultra-loose policy, the effects reach well beyond Japan. A key factor is the gap between Japanese rates and those abroad, which influences the yen. A weaker yen flatters exporters and draws tourists but raises the cost of imported energy and food.
- Rate gaps with other countries shape the yen.
- A weak yen helps exporters, hurts importers.
- Global investors watch for shifts in Japanese bond yields.
The balancing act
Move too quickly and the recovery could stall; move too slowly and the currency and prices can swing. That is why every signal from Tokyo is parsed so closely by markets across the Asia-Pacific.