The Bank of Japan raised its benchmark interest rate to 1.25% on Friday, taking borrowing costs to their highest level in more than three decades and adding a new risk for investors far beyond Tokyo.
The immediate reaction was calm. The yen weakened towards 157 per dollar and the Nikkei 225 rose, reflecting the fact that the move was widely expected and two policymakers dissented.
But the bigger issue for Wall Street is what happens if this is not the end of Japan’s tightening cycle.
Higher Japanese rates could make yen-funded carry trades less attractive and encourage some overseas capital to return home, two channels that could eventually hit richly valued US technology stocks.
The carry trade is the first pressure point
For years, investors have borrowed cheaply in yen and deployed the proceeds into higher-return assets overseas. US technology and AI stocks have been among the beneficiaries of that global search for yield.
That trade works best when Japanese rates stay low and the yen remains weak. The BoJ is now changing one side of that equation.
Friday’s increase was approved by a 7-2 vote, and the central bank signalled that rates could continue rising if its economic and inflation outlook develops as expected.
Underlying inflation is approaching 2%, while policymakers also flagged risks from oil, the weaker yen and AI-related demand.
Analysts has warned that a rapid strengthening of the yen could force investors to unwind leveraged positions, with high-valuation US technology shares particularly exposed.
It also noted that traders appear better prepared than during the sharp yen-driven sell-off in 2024, reducing the risk that every BoJ move automatically triggers disorderly selling.
Japanese money could start looking closer to home
There is a second transmission channel: Japanese investors themselves.
The Wall Street Journal estimates that Japanese investors hold about $2.5 trillion of US stocks, bonds and other securities, roughly half of Japan’s overseas portfolio holdings.
As yields rise at home, the relative attraction of US assets narrows.
A large-scale repatriation is unlikely to happen overnight, but even a gradual shift matters because Japan remains one of the world’s deepest pools of overseas capital.
If Japanese demand for Treasuries weakens, US bond yields could face additional upward pressure.
That would be particularly uncomfortable for technology shares, whose valuations are highly sensitive to changes in long-term discount rates.
The US 10-year Treasury yield has already spent part of this week near 5%, making that channel more relevant.
The yen means the tech threat is not immediate
There is an important caveat: Friday’s decision did not strengthen the yen.
The currency weakened after investors focused on the dissenting votes and cautious guidance.
Swissquote analyst Ipek Ozkardeskaya told MarketWatch before the decision that Japan’s nominal neutral rate could sit between 1.5% and 2%, potentially leaving room for another one to three increases.
That buys Wall Street time, as a weaker yen keeps the carry trade attractive and reduces the incentive for forced deleveraging.
But the direction of travel has changed. The BoJ has moved rates to 1.25% and another increase remains possible.
For US tech stocks, the risk is therefore not Friday’s hike itself, but what happens if Japanese rates keep rising and the yen finally follows.
This post BoJ hikes rates to 1.25%: why US tech stocks could be caught in the fallout may be modified as updates unfold
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