Rising Yen and Japanese Yields Trigger Global Financial Reversal

The sharp increase in Japanese interest rates has led to a reversal of decades-old global financial trends. The yen, which had become one of the world's great funding currencies, saw its value rise by over 12% on August 5, 2024, sparking a chain reaction that pulled at the cheap capital that flowed through global markets for years.

As Japan's interest rates rose to their highest since 1996, with the 10-year JGB yield approaching 3%, and the 30-year JGB yield above 4%, investors scrambled to unwind positions. The Bank of Japan had raised interest rates by just 0.25 percentage points days earlier, but this move was significant in a country where rates had been near-zero for decades.

The yen's strength and rising Japanese yields have pulled at the global 'carry trade', where investors borrowed cheaply in yen to invest in higher-yielding currencies and assets. This has led to a reversal of flows, with investors repatriating funds from foreign markets back to Japan.