Bank of Japan Ends the Era of Ultra-Loose Policy: What It Means for Global Bond Markets
- ▸The Bank of Japan raised its policy rate from -0.1% to positive territory in early 2024 and has continued gradual normalisation — ending a negative rate policy that lasted nearly a decade.
- ▸The BOJ's yield curve control programme, which capped 10-year Japanese government bond yields, has been phased out, allowing Japanese yields to rise and the yen to recover from historic lows.
- ▸The estimated $4 trillion yen carry trade — borrowing cheaply in yen to invest in higher-yielding global assets — is gradually unwinding, with significant implications for global bond and equity markets.
The Carry Trade Unwind
The yen carry trade — borrowing in Japan at near-zero rates and investing in higher-yielding currencies such as the US dollar, Australian dollar, or Indian rupee — is estimated at $3-4 trillion in notional exposure. When the BOJ hikes, the yen strengthens, the cost of carry rises, and investors are forced to sell their higher-yielding positions to repay yen loans. This creates synchronised selling pressure across multiple asset classes and geographies, amplified by the use of leverage.
JGB Market Dynamics
With YCC unwinding, 10-year JGB yields have risen from near 0% to approximately 1.2-1.5% — still low by global standards but a historic shift for Japan. Higher JGB yields have two key effects: they attract Japanese investor capital back from foreign bonds, and they raise the government's debt service costs. Japan carries a debt-to-GDP ratio above 260%, the highest among major economies. Even a 1 percentage point rise in average borrowing costs increases annual debt service by roughly 2.6% of GDP, a fiscal constraint that limits how aggressively the BOJ can normalise.
Currency Implications
The yen hit a 34-year low of 160 per dollar in April 2024 before BOJ intervention and rate hike expectations triggered a rapid recovery. Yen strength has ripple effects: Japanese export competitiveness weakens, import-heavy economies benefit from cheaper goods, and the compression of the yen-dollar spread reduces the carry trade's attractiveness. South Korea, Taiwan, and Thailand — which compete with Japan in export markets — benefit from a stronger yen.
The unwinding of yen carry trades — where investors borrow cheaply in Japan to invest in higher-yielding assets — has periodically triggered capital outflows from Indian equity and bond markets. When the BOJ hikes rates unexpectedly, yen appreciation forces carry traders to sell EM assets to repay yen-denominated loans. India, with significant FPI presence in its equity market, has seen sharp single-day outflows correlated with BOJ policy surprises. The RBI has managed these episodes by deploying forex reserves as a buffer, but sustained BOJ normalisation requires ongoing vigilance in India's capital account management.
Primary Sources
Cite This Article
Khagan Rao. (2026, June 28). Bank of Japan Ends the Era of Ultra-Loose Policy: What It Means for Global Bond Markets. EconoLens. https://econolens.co.in/news/boj-policy-normalisation-global-bond-markets-2026
Khagan Rao is an economist and analyst specialising in global monetary policy, fiscal frameworks, and international trade. He tracks publications from the IMF, World Bank, BIS, and RBI to deliver accessible, data-driven analysis for a global audience.