The Truth Behind the Bank of Japan’s “Hold Steady”: The Global Liquidity “Faucet” Is Quietly Being Turned Down

The Bank of Japan announced today that it will keep interest rates unchanged, but judging from what the officials said, the likelihood of a rate hike in June is gradually heating up.
Many people may not know that the Japanese yen is an “invisible supplier” of global dollar liquidity. Large amounts of funds borrow yen at low interest rates, convert it into dollars, and then flow into markets with higher returns—this is the classic “carry trade.” Once Japan raises interest rates, these leveraged arbitrage positions will be forced to unwind and shut down, and then global liquidity will be rapidly drained, causing broad declines across all kinds of markets.
Including the U.S. stock market that we’re all familiar with—it will be hit as well. In normal times, people may not feel good about Japan, but its impact on global financial markets is extremely large. We often assume that global liquidity depends only on the Federal Reserve, but in reality, Japan’s ultra-low interest rates are one of the “faucets” for global funds. Once rates are raised and the faucet is turned down, global markets will all have to tighten up along with it.
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