A decision by the Bank of Japan (BOJ) to raise its interest rate from 0.5% to 0.75% in December 2025 would mark the end of decades of ultra-easy monetary policy and act as a seismic event for global finance. The primary fallout would center on the Japanese Yen (JPY) and global capital flows.

The rate hike would trigger a significant strengthening of the JPY and lead to a mass unwinding of the JPY Carry Trade. In this key macro strategy, investors borrow cheap JPY to invest in higher-yielding assets abroad. As funds rush to buy JPY to repay these loans, they must sell foreign bonds and currencies, which can induce volatility in global fixed-income markets and potentially push yields higher worldwide.

The impact on the global economy would include deflationary pressure outside Japan and reduced capital outflows from Japanese institutional investors. For Emerging Markets (EM), which have recently thrived due to factors such as a weaker US Dollar, the unwind of the carry trade could trigger capital flight, putting downward pressure on their currencies and reversing some of their recent gains.

For Hedge Funds, this shift is a double-edged sword. While funds heavily leveraged in the carry trade face significant losses, Global Macro funds are ideally positioned to profit from the resulting high dispersion and volatility. They would seek alpha by aggressively betting on a stronger Yen, steeper yield curves, and exploiting the resulting cross-market price dislocations, aligning with the mathematically rigorous approach favored by systematic strategies.

End Notes

Source: https://www.reuters.com/world/asia-pacific/boj-chief-ueda-says-weak-yen-could-affect-underlying-inflation-2025-11-21/