According to a Reuters report, economists warn that higher rates could prompt households to shift large sums of idle cash into interest-bearing deposits, potentially reshaping Japan’s domestic funding landscape and creating spillover effects in global asset allocation.
End of Ultra-Easy Policy and a New Phase for Liquidity
The policy pivot comes after the Bank of Japan exited its ultra-loose monetary regime in 2024, marking the end of years of aggressive stimulus. Since then, borrowing costs have been raised several times, pushing the policy rate to its highest level in decades by late 2025. Markets are now increasingly pricing in another hike in the coming months, signalling confidence that Japan is steadily transitioning toward a more normalised interest-rate environment.This normalization matters far beyond Japan because the country has long been a major source of global liquidity through carry trades and overseas investments. As domestic yields become more attractive, Japanese investors may repatriate funds, influencing bond yields, currencies, and equity valuations globally.
Potential Shift of Household Savings
Ikuko Samikawa of the Japan Center for Economic Research noted that the move away from near-zero rates could prompt significant reallocations of household savings toward bank deposits. Japan holds one of the world’s largest pools of household financial assets, so even modest shifts can have meaningful market effects.
Historically, when policy rates have moved above certain thresholds, households have shown a tendency to favor bank deposits over cash holdings. A similar pattern could emerge again, increasing deposits within the banking system.
Implications for Money Markets and Policy Transmission
An increase in deposits would raise the reserves that financial institutions hold with the central bank, which could put downward pressure on short-term money market rates. This dynamic may complicate the central bank’s efforts to steer rates toward its intended target, particularly as it simultaneously reduces its balance sheet after years of asset purchases.
Japan’s central bank balance sheet expanded dramatically over the past two decades, and policymakers are now navigating the delicate process of shrinking excess liquidity without destabilizing funding markets.
Why Global Investors Are Watching Closely
For global stock markets, the implications are significant. Japan has been a key provider of low-cost funding for international investments. If domestic yields rise and capital flows shift inward, global equities — especially in emerging markets and high-growth sectors — could face tighter financial conditions.
Higher Japanese rates can also influence global bond markets by pushing up yields elsewhere, as investors reassess relative returns. Currency markets may see volatility as well, particularly if the yen strengthens alongside repatriation flows.
A Delicate Balancing Act Ahead
The evolving rate environment underscores the challenge facing Japanese policymakers: tightening enough to normalize conditions while avoiding disruptions to financial markets. Data estimates suggest that reserve balances could be reduced substantially without triggering sharp rate spikes, though outcomes will depend on credit demand and broader economic conditions.
For investors around the world, Japan’s policy trajectory serves as a reminder that even gradual changes in major economies can reverberate widely, shaping liquidity, risk appetite, and the direction of global stock markets in the months ahead.