In simple terms, everyone is afraid of the yen interest rate hike because the yen has long played the role of a 'cheap ATM' in the global financial market. Once this ATM requires higher interest, the flow of global funds will undergo dramatic changes.
We can break down this financial logic into the following three keywords:
1. The 'collapse' of carry trades (Carry Trade Unwind)
This is the core reason that everyone fears the most.
What is a carry trade? Due to Japan's long-term maintenance of near 0% or even negative interest rates, global investors (such as hedge funds and large institutions) borrow low-cost yen and then exchange it for dollars or other currencies to buy higher-yielding assets (such as U.S. Treasuries, U.S. stocks, AI chip stocks, or even cryptocurrencies).
Consequences of Interest Rate Hikes: If the yen interest rate increases, the cost of borrowing rises; at the same time, interest rate hikes often lead to the appreciation of the yen.
Chain Reaction: The cost of borrowing yen increases + it becomes more expensive to repay in yen (exchange rate losses). At this point, global investors will sell their US stocks, US bonds, and various risk assets at any cost to convert back to yen to pay off debts, in order to 'save their lives.' This large-scale capital withdrawal will trigger a global stock market crash, similar to the 'Black Monday' that occurred on August 5, 2024.
2. The 'Repatriation' of Japan's Huge Overseas Funds
Japan is not only a source of low-interest loans but also the world's largest creditor nation.
Japanese Money is Spread Across the Globe: Due to lack of domestic returns, Japanese banks, insurance companies, and pension funds hold massive amounts of overseas assets (especially US bonds, with Japan being the largest foreign holder of US Treasury bonds).
Repatriation Motivation: If domestic interest rates in Japan rise significantly, Japanese investors may feel that 'rather than taking risks buying overseas assets, it's better to return home and buy government bonds with higher interest rates.'
Market Shock: Once these funds start selling US bonds on a large scale to repatriate to Japan, it will cause US bond yields to soar (prices to fall), which in turn will raise global borrowing costs and intensify global financial pressure.
3. The 'End' Signal of the Era of Cheap Money
Japan is the last country among developed markets to maintain ultra-low interest rates.
The Last Safe Haven Disappears: The market fears that once Japan enters a sustained interest rate hike cycle, the world will completely bid farewell to the era of 'cheap liquidity' that has lasted for over a decade.
Vulnerability Magnified: The current global stock market (especially US AI stocks) has accumulated a large amount of profit-taking positions, making the market itself very fragile. In this context, a yen interest rate hike acts more like a trigger (catalyst), easily prompting a panic exit of funds.
Summary
What people fear is not the small interest rate increments of 0.25% or 0.5%, but the forced liquidation of trillions of dollars in arbitrage positions behind it. When the globally liquid 'cornerstone' of the yen begins to loosen, the entire global asset structure will feel shaky.
