Japan's Slowdown Threatens Global Markets and Liquidity

Japan's economic growth has slowed down significantly, and its impact is being felt globally. The country's real GDP grew at an annualized rate of 1.1% in the second quarter of 2026, which is lower than the expected 2% annualized growth. Private consumption weakened, capital investment fell by 1.2%, while external demand provided support.

The weakness of Japan's economy has become a global concern due to its significant role in international finance. For decades, Japan has been one of the world's most important sources of cheap money. This has encouraged investors to borrow in yen and invest in assets offering higher returns elsewhere, known as the yen carry trade.

However, if the Bank of Japan raises interest rates and the yen strengthens, the economics of the carry trade change. Investors may be forced to reverse their trades, sell foreign assets, convert the proceeds into yen, and repay their Japanese borrowing. This could reduce global liquidity and increase volatility across several regions at the same time.