The Bank of Japan's interest rate hike decisions may have significant effects on the global economy. We can say that Japan is a major economy that has been following an ultra-loose monetary policy for many years.

Japan, which has been implementing negative interest rates since 2016, increased interest rates by increasing them to 0.10 in 2024, and increased them to 0.50 with the latest interest rate hike. The interest rate hikes that started in 2024 seem to have an inevitable impact not only on Japan, but also on global financial markets and developing economies.

Japan, which implemented an economic policy unprecedented in world history after the asset bubble that burst in the 1990s, became a country that struggled with deflation by fixing interest rates to zero and pushed monetary expansion to its extreme limits. However, with the revival of inflation, wage increases and domestic demand in 2024, the Bank of Japan was forced to increase interest rates to reduce inflation.

The increase in interest rates seems to deeply affect global investment balances. Because Japan was one of the most important sources of cheap money. With the increase in interest rates in Japan, global capital will shift to a position where it will provide better returns in its home country instead of places with relatively high interest rates in emerging markets. It will especially cause the cary trade strategy to deteriorate. The wind seems to have turned for capital that borrowed in Japanese yen at low interest rates and turned to high-interest assets in developing countries...

On the other hand, the interest rate decision of the Bank of Japan will affect the yield of central bank bonds of not only developing countries but also developed countries in America and Europe. The return of funds to Japan may cause a decrease in demand in the global bond market and an increase in interest rates. This will have an increasing effect on borrowing costs.

The rules of the game determined by central banks for a long time now need to be rewritten. This transformation in Japan does not only indicate an increase in interest rates; it also indicates a change in the global economic paradigm. It is obvious that the era of ultra-loose monetary policy is coming to an end in the world and that the low-interest financial order will give way to more expensive capital.

This new world order poses serious risks for countries with weak economic foundations, high foreign debt, and delayed structural reforms. Developing countries can more easily control these risks with reforms that will attract direct investment instead of hot money, high value-added production and policies that will reduce energy dependency.

As a result, Japan's interest rate hike will cause money flows to shift and cheap money to become history, causing the cost of money to increase. The world has come to the end of cheap money and carry trade. The possible economic effects of this can be reduced, especially for developing country economies, with serious measures.

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