The Bank of Japan raised its policy rate to 1% for the first time since 1995 and signaled an end to bond purchase reductions from next year; yen strength and a steepening of the JGB curve will follow as carry trades unwind.
What moved
The Bank of Japan raised its policy rate to 1% for the first time since 1995 and signaled an end to bond purchase reductions from next year; yen strength and a steepening of the JGB curve will follow as carry trades unwind.
The market transmission
A 1% policy rate marks a material tightening after decades of ultra-loose policy. Carry trade positioning in USDJPY and other yen crosses will face pressure as funding costs rise. The JGB curve will steepen as the BoJ pulls back from yield curve control, repricing longer-dated rates higher. This is mechanical: a move from a 0.25% repo floor to 1% raises the hurdle rate for leveraged positions funded in yen.
What would change this
The announcement itself confirms expectations that have been building for months; markets may already be pricing much of the move. The real repricing hinges on how the BoJ executes the bond purchase transition from next year. If the pace is gradual, near-term yen strength may be muted. Severity depends on positioning: if carry trades have already substantially deleveraged, the move is confirmation, not shock.
Directional leans
USDJPY ▼ highJGB10Y ▲ high