Japan is the last to keep rates below zero

The Bank of Japan stands alone as the final holdout of negative interest rate policy. At its final policy meeting of 2023, Governor Kazuo Ueda chose to keep the benchmark rate at minus 0.1 per cent, declining to offer explicit forward guidance on the timing of a historic exit. In doing so, the BoJ has granted a temporary lease of life to the global yen carry trade.

The Carry Trade Subsidy

With Japan maintaining negative borrowing costs while global central banks hold rates above five per cent, the yen remains the world’s favourite funding currency. Investors borrow yen for next to nothing to buy higher-yielding sovereign debt and credit overseas. Ueda’s reluctance to act preserves this lucrative carry trade, but it leaves the yen vulnerable to violent snap-backs once domestic wage negotiations force Tokyo’s hand.

By delaying its exit from negative interest rates, the Bank of Japan continues to subsidize global risk appetite, but every week of hesitation magnifies the eventual carry-trade unwind.