BOJ's Era of Prolonged Ultra-Loose Policy Approaches Conclusion, Sparking Worldwide Rise in Yields

Japanese Policy Shift Drives Global Market Volatility

On December 1, 2025, the yield on the U.S. 10-year Treasury note soared to 4.086%, a move fueled by Japanese investors reallocating funds in response to signals from the Bank of Japan (BOJ) about a possible interest rate increase. This development highlights rising turbulence in global markets as Japan appears poised to move away from its long-standing ultra-loose monetary stance, with significant repercussions for bond yields, currency exchange rates, and riskier investments worldwide.

BOJ Signals End to Ultra-Low Rates

The shift in the BOJ’s approach became evident when Governor Kazuo Ueda announced on December 1 that the central bank would weigh the advantages and disadvantages of raising rates at its upcoming December 18-19 meeting. This marked a notable change from the BOJ’s previously cautious tone, reigniting speculation about the end of decades of near-zero interest rates. As a result, yields on Japan’s 10-year government bonds surged to 1.845%—a level not seen since 2008—while two-year yields reached 1%, the highest in 17 years. The yen also appreciated against the U.S. dollar, intensifying worries about the unwinding of the yen carry trade, where investors had borrowed at low Japanese rates to invest in higher-yielding assets abroad.

Global Impact and Market Reactions

Financial experts caution that a tighter BOJ policy could have far-reaching effects on global liquidity. Ryan Jacobs of Jacobs Investment Management pointed out that a stronger yen and higher Japanese yields may draw capital away from U.S. stocks and bonds, potentially triggering widespread shifts across asset classes. The reversal of the yen carry trade, reminiscent of the market upheaval in August 2024, has already weighed on cryptocurrencies—Bitcoin, for example, fell by as much as 8% on Monday. The yen’s 0.4% rise against the dollar further underscored changing liquidity conditions as investors reconsidered risk premiums in light of Japan’s evolving monetary policy.

Policy Coordination and Political Developments

Close cooperation between the BOJ and the Japanese government has helped ease fears of conflicting policy directions. Finance Minister Satsuki Katayama stressed that there is no disconnect between the government and the central bank’s economic outlook, reaffirming their joint commitment to achieving a 2% inflation target. Meanwhile, Prime Minister Sanae Takaichi’s focus on reflation has taken a back seat as concerns over a weakening yen and rising inflation come to the forefront. Within the BOJ, board members such as Junko Koeda and Kazuyuki Masu have also voiced support for rate hikes to address inflation risks.

Looking Ahead: Global Monetary Policy at a Crossroads

The upcoming U.S. Federal Reserve meeting on December 10 and any potential rate adjustments could influence the BOJ’s next steps. However, market participants are now factoring in a 76% chance of a rate hike by the BOJ in December and over a 90% probability for January. Should the BOJ proceed, it would be the first rate increase since 2008, signaling a significant shift toward global monetary policy normalization.

The effects are not limited to bonds. U.S. stock markets have come under pressure, with both the S&P 500 and Nasdaq 100 slipping by 0.2% as investors adopt a more cautious stance. In the cryptocurrency sector, the retreat of capital previously fueled by cheap yen threatens to intensify bearish trends, as speculative money moves toward safer investments.