Japan raised interest rates to a record high – and the move may reverberate in global markets

Japan's central bank raised its key interest rate to 1.25%, the highest level since 1995, after 31 years of near-zero rates. The move aims to curb rising living costs driven by higher oil prices amid the Middle East war, a weaker yen, and a global surge in demand for chips. The rate hike could disrupt the global Carry Trade strategy, where investors borrowed cheaply in Japan to invest abroad, potentially triggering market volatility.

Japan's central bank raised its key interest rate from 1% to 1.25% on Friday, the highest level since 1995. This move marks the end of a long era of zero or negative rates in Japan and is intended to halt rising prices in the country. The cost of living in Japan is climbing rapidly due to several factors: oil prices are rising amid the Middle East war, the local currency is weakening against the dollar, and there is a global increase in demand for components such as chips and artificial intelligence. The rate hike is expected to impact global markets through the Carry Trade mechanism: for decades, investors and giant funds took out huge loans in Japan almost for free, converted them into dollars, and invested in stocks, real estate, and bonds in other countries. Now, as rates rise, loans become more expensive, and investors are forced to sell assets around the world to repay the loans, which could lead to declines and turmoil in leading stock exchanges in the US and globally. According to economists' forecasts, Japan's interest rates may continue to rise next year as well.