Japan’s higher rates raise stakes for global markets

Japan’s stronger growth and rising interest rates could redirect domestic capital away from global assets and add upward pressure to yields worldwide.

• Governments face large financing needs, technology companies are issuing debt to fund artificial intelligence investment, defense spending is rising, and quantitative tightening is returning more bonds to private markets.
• Japanese investors hold substantial overseas bonds and equities, while low domestic rates have made the yen an important funding currency for global carry trades.
• The yen fell to a near 40-year low against the U.S. dollar before the United States and Japan collaborated in late July to support the currency.
• Japan’s growth is increasingly driven by domestic demand, including stronger wages, recovering consumption, and continued corporate investment; Vanguard describes the economy as “high-pressure” because of demand and structural labor shortages.
• Vanguard expects two additional 25-basis-point BoJ hikes in 2026, taking the policy rate to 1.5% by year-end, followed by normalization to 2% in 2027; its rates team sees a 2%–2.5% neutral-rate landing zone.

Takeaway: Japanese assets may compete more strongly for global capital as domestic yields rise, potentially lifting global yields, although the BoJ must balance inflation and currency pressures against a stronger yen, weaker exporters, and higher government borrowing costs.