Bank of Japan raises benchmark rate to 1.25%, highest in 30 years

Japan rate hike may pull $2.5 trillion in capital from U.S. markets

The Bank of Japan said Friday it raised its benchmark interest rate to 1.25%, its highest level in 30 years, and signaled more increases are on the way — a policy shift with the potential for ripple effects far beyond Japan’s shores.

Japanese investors hold approximately $2.5 trillion in U.S. stocks, bonds and other financial assets, accounting for about half of Japan’s $5 trillion in overseas portfolio holdings, according to The Wall Street Journal. As Japanese rates rise, the prospect of higher returns at home could lure some of that capital back, slowing or reversing what has been a reliable stream of cash supporting U.S. and other global markets.

“The yen supertanker is turning,” said Rory Green, head of Asia and emerging markets research at GlobalData TS Lombard in London.

The Bank of Japan’s decision followed a rate increase by the Federal Reserve on Wednesday, as well as an unusually public campaign by Treasury Secretary Scott Bessent urging Japan to raise borrowing costs. Other central banks are expected to follow as the war in Iran squeezes energy supplies and fuels inflation.

The moves come amid surging bond yields globally. The yield on the 10-year U.S. Treasury note stood at 5.01% as of the article’s date, according to Federal Reserve data. In Japan, 10-year yields are around 3%, a level not seen since the mid-1990s. Rising yields reflect investor concerns about inflation and government finances, alongside some optimism about artificial intelligence and how it might transform economic growth.

For decades, low rates in Japan pushed Japanese investors overseas in search of better returns, accumulating U.S. Treasurys and European government bonds, as well as stocks, corporate debt and other assets. Japanese banks borrowed cheaply at home to lend overseas, pocketing the spread.

Japan’s Government Pension Investment Fund, which manages more than $2 trillion on behalf of Japanese workers, used to park around 60% of its assets in Japanese government bonds. More than a decade ago, the fund began shifting into foreign debt and equities; today domestic Japanese bonds account for about a quarter of its portfolio.

To hit return targets, “they realized they needed more of an allocation to equities,” said Eiji Ueda, who was chief investment officer at GPIF from 2020 to 2025 and is now head of Asia-Pacific at Apollo Global Management in Tokyo. GPIF owns around $240 billion of U.S. government bonds, according to recent financial statements, and its biggest foreign equity holdings are Nvidia, Apple and Microsoft.

Japan’s finance minister, Satsuki Katayama, has said she would like to see GPIF invest more of its assets at home, though government officials who oversee the fund have said no new decisions have been made.

For the U.S., Japanese investors pulling back from Treasurys would add to upward pressure on yields, which move inversely to bond prices. In a rare joint intervention with Tokyo to prop up the yen, Bessent said Japan should consider borrowing dollars from the Federal Reserve rather than selling down its Treasury holdings.

Japan is the largest holder of U.S. Treasurys, according to Treasury data, with around $1.1 trillion invested as of the end of July. That is down from a peak of $1.2 trillion in February, before Japan’s efforts to prop up the yen.

Analysts and investors cautioned that any redirection of Japanese capital would be gradual and contingent on the Bank of Japan following through with further rate increases despite pockets of weakness in the economy. Gently rising rates in Japan might also not be enough to tempt Japanese investors to bring that much money home when they could put it in American technology stocks or pick up higher yields on other countries’ bonds, which remain above those in Japan.

“At this point, I’m not expecting a huge repatriation of money coming from U.S. Treasurys to Japan,” said Norihiro Yamaguchi, lead Japan economist at Oxford Economics in Tokyo. He said it would take more clarity on how high the BOJ intends to take its benchmark interest rate to spur Japanese investors to shift more into domestic assets.