How will Japan’s rate increase affect capital flow in global financial markets? - South China Morning Post

Japan's exit from negative interest rates marks a structural shift for global capital flows. For years, near-zero domestic borrowing costs encouraged Japanese investors—insurers, pension funds, and households—to seek higher yields abroad, particularly in US Treasuries and other foreign assets. Even a modest rise in Japanese yields can alter that calculus, since domestic bonds become relatively more attractive on a hedged or unhedged basis.

The key transmission channel is the yen. Higher Japanese rates tend to support the currency, which can erode the returns Japanese investors earn on unhedged foreign holdings. If that prompts some repatriation, it could pressure assets that have relied on Japanese demand, though the effect depends on how gradually the Bank of Japan moves and how other central banks respond.

What to watch: the pace of further BOJ tightening, the interest-rate differential with the US, and yen hedging costs. These variables, rather than any single decision, will determine whether this becomes a lasting reallocation or a contained adjustment.