BOJ ending its negative rate policy: what is likely to happen?

3 min readApr 11, 2024

In an unprecedented move, the Bank of Japan (BoJ) decides to pivot away from its long-standing negative interest rate policy (NIRP) and its distinctive Yield Curve Control (YCC) program.

This strategic shift is poised to reverberate through the corridors of global finance, unsettling the longstanding carry trade strategy and casting a wide net of implications across the global financial markets. This article aims to dissect these ramifications, offering a comprehensive insight into the consequences of such a significant policy turnaround.

Understanding the Policies

Since 2016, the BoJ’s NIRP and YCC have been central to Japan’s aggressive monetary easing strategy, designed to combat deflation and stimulate economic growth. By imposing costs on banks for holding excess reserves (NIRP) and controlling the yield curve to keep long-term interest rates low (YCC), these policies have sought to encourage lending and investment.

The Carry Trade Conundrum

A favored strategy among investors, the carry trade — borrowing in currencies with low-interest rates to invest in higher-yielding ones — has thrived in an era of ultra-low Japanese rates. The yen’s role as a funding currency in these trades could be upended by the BoJ’s policy shift, leading to a cascade of adjustments in the currency and financial markets.

The Domino Effect on Global Financial Markets

1. Currency Appreciation and Investment Costs: The yen is likely to appreciate as interest rates rise, altering the dynamics of the carry trade and increasing the costs for borrowers. This adjustment could trigger a sell-off in higher-yielding assets as investors scramble to close their positions.

2. Emerging Market Volatility: With carry trades often targeting higher yields in emerging markets, a pullback could lead to significant capital outflows and heightened volatility, affecting currencies, stock markets, and economic stability in these regions.

3. Global Capital Flows and Investment Patterns: A rebalancing of global investment flows might ensue, with capital being drawn towards Japanese assets as yields rise. This shift could have a cooling effect on markets that have benefited from the search for yield, including real estate and corporate debt in higher-yielding jurisdictions.

Scenario: The Australian Dollar (AUD)

The Australian dollar, a frequent beneficiary of carry trade flows due to Australia’s historically higher interest rates, offers a tangible example of potential impacts. An end to the BoJ’s NIRP and YCC could lead to a depreciation of the AUD as the carry trade unwinds, with wider implications for Australia’s economy, from export competitiveness to financial conditions.

What’s next?

The BoJ’s pivot away from NIRP and YCC is a significant moment in monetary policy, representing a move towards normalization after years of extraordinary measures. This transition is likely to be fraught with challenges, affecting everything from currency values to global investment flows and the profitability of financial institutions involved in carry trades. The specific outcomes will hinge on numerous factors, including the speed of policy change and the responses of other central banks.

The global financial community stands at a critical juncture, with investors and policymakers alike needing to adapt to a new paradigm. The end of Japan’s negative interest rates and YCC marks not just a policy shift but a turning point that could redefine global financial markets for years to come.