Bank of Japan Raises Rates to End Decades of Abnormal Policy

The Bank of Japan is ending decades of abnormal economic policy by raising interest rates and reducing sovereign bond purchases. This normalization process aims to combat long-term deflation and manage moderate inflation, pushing Japan's 10-year note yields to their highest levels in approximately 30 years.

These domestic shifts are driving turbulence across global bond markets. Japanese institutional investors are moving capital back to domestic markets, while the Ministry of Finance of Japan is selling US Treasuries to support the yen. Although officials describe the transition as an orderly return to economic fundamentals, the shift is increasing pressure on global borrowing costs.

The normalization process faces complications from external pressures. Energy price spikes resulting from conflicts in Ukraine and the Middle East, alongside increased corporate debt demand driven by artificial intelligence, have added volatility. Additionally, widespread concerns over fiscal sustainability continue to influence the pace of the transition.