With the rise in interest rates in Japan and the loss of the value of the yen, the country's economic situation is not good. And even if you don't know it, a worsening of the Japanese economy directly impacts the liquidity of the global economy. Curious to know why this is?
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What is the economic situation in Japan?
The situation in Japan is definitely not good. At the end of 2025, the Bank of Japan raised interest rates to 0.75%, an interest level that may seem low when compared to other countries, but is one of the highest in recent decades in the country. It's a situation that Japan's own economists and finance professionals are not used to, because they have lived with an interest rate close to 0% for a long time, something that other countries around the world have been facing for a long time.
In relation to the Japanese currency, the yen is approaching a complicated level of 160 yen per dollar. This is an important mark, because in addition to being a round number and affecting psychologically, the last exchange rate intervention occurred when the currency almost reached 162 yen per dollar in July 2024, that is, with the yen being traded at 158, investors are already beginning to speculate that there may be some type of intervention, which could make the situation worse.
For any country, a deterioration of its currency in comparison to the dollar is always a problem, because as products from abroad are imported based on dollarized prices, the weakening of its currency harms the consumption of families and companies in the country. Furthermore, because Japan is an island, the country needs a variety of products.
The exchange rate issue is one of the major concerns of the Japanese authorities, who recently announced that they may take measures to combat exchange rate volatility, not ruling out exchange rate intervention, to contain excessive exchange rate movements. This is an unusual situation in Japan and may have further impacts in the future.
What is the relationship between Japan and Global Liquidity?
But you may be wondering: What is Japan's relationship with Global Liquidity? With the rise in interest rates, this means that the world will go through a period of reduced investment, because there is no longer any place to obtain loans close to zero interest. This means that global liquidity, which existed due to Japanese interest rates, will now be more selective and cautious.
More directly, the increase in the interest rate to 0.75% causes a reduction in the spread of several countries and companies, which borrowed money in Japan at 0 or close to 0 interest, invested and then paid the principal without additional. When interest rates were low, investors did the so-called Carry-Trade, taking out a loan in Japan at low interest rates and investing in the American treasury to earn from this difference. However, as Japanese interest rates are now rising and US interest rates are falling, this practice is also decreasing, also affecting the dollar's liquidity.
