Bank of Japan Set to Hike Rates to 30-Year High Friday. Why That’s Bad for the US.

The Japanese flag flutters above the Bank of Japan headquarters in Tokyo. (Kazuhiro NOGI/AFP via Getty Images)

Key Points

• The Bank of Japan is expected to raise interest rates by a quarter percentage point to 0.75% this week, a 30-year high.
• A rate hike could impact U.S. markets by unraveling the carry trade and potentially reducing demand for U.S. Treasuries.
• Japanese companies anticipate continued wage growth next year, supporting the case for further interest rate increases.

The Bank of Japan is widely expected to hike interest rates this week. It’s a policy decision that could have a knock-on effect for U.S. markets, driving up borrowing costs for both the government and ordinary Americans.

The market is pricing in an 82% chance that the BOJ will raise rates by a quarter point to 0.75% when its two-day policy meeting ends on Friday, according to LSEG data. That would be a 30-year high.

Gov. Kazuo Ueda could signal further tightening in his post-decision conference, having made clear in a speech earlier this month that a December rate hike was coming.

Policymakers are trying to rein in inflation, which crept up between August and October. Japanese companies expect wages to carry on rising next year, a BOJ survey published on Monday showed, which could strengthen the case for further rate hikes.

“The BOJ is now confident that wage growth, and therefore underlying inflation will be solid, so it’s ready to adjust rates,” Nomura foreign-exchange strategist Yusuke Miyairi tells Barron’s in an interview. He expects Ueda to signal further rate hikes on Friday, but doubts that the BOJ governor will commit to a specific time frame.

U.S. investors should be paying attention to the decision. If Ueda signals that further rate hikes are coming, it could unravel the so-called carry trade —where investors borrow Japanese yen as a cheap, low-risk source of cash, then invest it in higher-yielding U.S. Treasuries—or other assets.

“If Ueda’s board is making anything clear, it’s that the BOJ is done financing the rest of the world’s risk-taking,” writes Yardeni Research’s Ed Yardeni.

Japanese investors alone have poured hundreds of billions into Treasuries in recent years, and higher rates could bolster the case for them to put their money to work elsewhere—and that’s the last thing the U.S. needs at a time when investors are fretting about the ballooning deficit and lofty artificial-intelligence valuations.

“That carry trade is already vulnerable [because] of the shrinking spread between US and Japanese yields,” writes the Bear Trap Report’s Larry McDonald. The difference between the yields on the 10-year Treasury and 10-year Japanese debt is 2.2 percentage points, down from 3.3 points one year ago.

Friday’s decision could also weigh on demand for Japanese stocks. Tokyo’s flagship Nikkei 225 index is up 24% this year, handily outperforming the U.S. S&P 500, while the yen is up 1.5% against the dollar in 2025.

Write to George Glover at george.glover@dowjones.com