Bank of Japan raises rates to 1%, yen hits 23-month low

Rate Hike, Currency Decline

The BOJ's decision passed 7-1, with board member Asada Toichiro as the lone dissenter. The move raised rates from 0.75%, which had been in place since December 2025. Yet markets responded with skepticism. The yen responded by doing the exact opposite of what a rate hike is supposed to accomplish: it fell off a cliff.

This paradox reveals a deeper problem. The fact that the currency still plummeted despite markets broadly expecting this hike suggests traders see structural weaknesses that a quarter-point increase simply cannot patch. Japan's debt-to-GDP ratio remains the highest among major economies, and every rate increase adds pressure to government finances already strained by decades of stimulus.

Stocks Surge, Exports Gain

The weakness wasn't universal. The Nikkei 225 index surged past 71,000 for the first time, setting a new record high. A weaker yen makes Japanese exports cheaper on the global market, which directly benefits the country's major manufacturers and exporters like Toyota and Sony.

Rising energy prices, partly driven by geopolitical tensions involving Iran, have forced the BOJ's hand on inflation. The central bank faced a bind: allow prices to drift higher, or tighten policy and risk compressing already-weak growth.

Carry-Trade Risk

The yen's decline keeps one trade alive. The yen carry trade, where investors borrow in low-yielding yen to invest in higher-yielding assets elsewhere, remains attractive even at 1% Japanese rates. This dynamic has fueled demand for risk assets globally, including crypto.

But there's a tail risk. The risk scenario that crypto investors should be watching is a disorderly yen decline. If the currency drops fast enough, carry-trade positions could unwind rapidly, forcing deleveraging that pulls liquidity out of risk assets. That's the scenario that matters most for markets beyond Japan.