9th September 2026
A change in Japanese interest rates could have consequences for Britain's borrowing costs, mortgages and public finances
At first sight, the Japanese yen seems to have very little to do with the cost of borrowing money in Britain.
The yen is Japan's currency, the Bank of Japan sets Japanese interest rates and the Bank of England sets British interest rates. So why should anyone in Britain care if the yen suddenly starts rising?
The answer lies in something called the yen carry trade, and although that sounds like a subject for financial traders rather than ordinary households, it could become increasingly important.
The yen has strengthened sharply in recent days, reaching about 153 to the dollar after being around 160 only a week earlier. Markets are increasingly expecting the Bank of Japan to raise interest rates at its September meeting.
That matters because Japan has spent decades as a source of exceptionally cheap money.
Investors could borrow yen at very low interest rates and then convert the money into dollars, pounds or other currencies and invest it in assets offering higher returns. Government bonds were an obvious destination.
It was rather like borrowing cheaply in one country and lending the money somewhere else at a higher rate.
For years, that trade worked remarkably well.
But now the conditions are changing.
When cheap Japanese money isn't so cheap
If Japanese interest rates rise and the yen strengthens, the calculation changes.
An investor who borrowed yen now has to think about the cost of buying those yen back to repay the loan. If the yen has become substantially more valuable against the pound or dollar, repayment becomes more expensive.
That can encourage investors to unwind their positions.
They sell some of the assets they bought with the borrowed money, buy yen and repay their Japanese borrowing.
And this is where the story becomes global.
Reuters reports that cross-border yen borrowing had reached around 360 trillion yen, equivalent to $2.35 trillion, by March. That gives some idea of the potential scale of the financial positions involved.
Nobody knows exactly how much of that money would actually be withdrawn from foreign markets if the yen continues rising.
But even a relatively small change in the behaviour of such a large pool of money can move financial markets.
What does that have to do with Britain?
Japan is a major international investor and Japanese money has traditionally found its way into overseas government bonds.
If Japanese investors increasingly decide that their own government bonds offer an attractive return, they have less reason to send money abroad.
That matters to Britain because the UK needs to sell enormous quantities of government debt.
When demand for government bonds weakens, their prices can fall and their yields rise.
And the yield on a government bond is effectively the interest rate investors are demanding to lend the Government money.
Britain is already facing uncomfortable borrowing costs.
On Tuesday, the UK sold £4.25 billion of 30-year gilts at a yield of about 5.83%, the highest rate recorded at a gilt sale since the Debt Management Office was established in 1998.
That does not mean Japanese investors suddenly caused Britain's borrowing costs to reach 5.83%. Far from it.
There are much bigger forces involved at present, including global inflation concerns, the war in Iran, high energy prices and worries about government debt.
But the yen story could become another pressure on the global bond market.
And this is where ordinary borrowers come in]/b]
A rise in gilt yields does not automatically mean the Bank of England will raise Bank Rate.
That distinction is important.
The Bank of England controls Bank Rate, while the market determines the yields on government bonds.
But gilt yields influence the cost of borrowing throughout the economy. They affect the rates available on mortgages, business loans and other forms of long-term finance.
So Britain could find itself in an uncomfortable position.
The economy might be weak enough to justify lower Bank Rate, while financial markets are demanding higher returns from investors buying British government debt.
That makes life considerably more difficult for the Chancellor and the Bank of England.
[b]There is another problem
Britain is not the only country borrowing heavily.
Governments around the world are issuing large quantities of debt, and investors have choices about where they put their money.
Japan is now becoming more attractive to its own investors because Japanese government bond yields have risen significantly. Reuters has reported that the 10-year Japanese government bond yield has reached around 3%, a level not seen for three decades, potentially encouraging capital to return home.
This is important because the world has become accustomed to Japanese money flowing outwards in search of better returns.
If that flow starts to reverse, other countries have to compete harder for international investors.
Britain cannot assume that investors will always be happy to lend to it at yesterday's interest rates.
Britain already has enough problems
The yen therefore should not be viewed in isolation.
Oil prices are also approaching $100 a barrel, creating another potential source of inflation. Global bond markets have already been under pressure as investors worry about government debt and inflation.
Put those things together and the problem becomes clearer.
If oil pushes inflation higher, central banks may find it harder to cut interest rates.
If Japanese interest rates rise and the yen strengthens, some Japanese money may return home.
If global investors become more nervous about government debt, they may demand higher returns.
And if Britain has to pay more to borrow, the Government's already substantial debt interest bill becomes even more expensive.
That is a particularly uncomfortable prospect when the UK is already paying around £110 billion a year in debt interest, according to current reporting.
Should we be worried?
Not because the yen is rising today.
Currencies rise and fall and the carry trade has been unwound before. Markets have also become more alert to the risks following the dramatic yen-related market turmoil of 2024.
The important question is whether this is simply a temporary adjustment or the beginning of a much bigger change in the flow of international capital.
For decades, cheap Japanese money has been one of the quiet forces supporting financial markets around the world.
If Japan starts keeping more of its money at home, the rest of the world has to compete harder for investors.
And Britain, with a large budget deficit, substantial government debt and already elevated gilt yields, cannot afford to ignore that competition.
So the rising yen is not directly going to put up British mortgage rates tomorrow.
But it is a reminder of something that is easy to forget in an interconnected financial world:
Britain's interest rates are not determined entirely in London.
What happens in Tokyo, Washington, the Middle East and financial markets around the world can eventually find its way into the cost of borrowing money here at home.
And sometimes the biggest threats to Britain's finances do not begin in Britain at all.