18th September 2026
The Bank of Japan has raised interest rates again, taking its benchmark rate from 1% to 1.25%, the highest level in Japan for around three decades.
On the face of it, this might seem like a Japanese problem. In reality, it is another piece of a much bigger change taking place across the world's financial markets.
For decades Japan was the odd one out among major economies. Interest rates were kept at exceptionally low levels, and for several years they were actually negative. Japanese investors and international financial institutions became accustomed to borrowing money cheaply in yen and investing it elsewhere.
That helped create what became known as the yen carry trade.
The attraction was simple. Borrow cheaply in Japan, convert the money into another currency and invest it in assets offering higher returns. The money could find its way into government bonds, shares and other investments around the world.
Now that Japan is raising rates, the calculation begins to change.
At 1.25%, Japanese interest rates are still low compared with Britain and the United States. But what matters to financial markets is the direction of travel. If investors believe Japanese rates will continue rising, the incentive to borrow yen and invest elsewhere becomes smaller.
That can lead to money gradually moving back towards Japan.
It does not mean Japanese investors will suddenly sell everything overseas. The process is much more complicated and can take place over months or years. But even relatively small changes in the enormous pool of Japanese investment can affect bond yields, exchange rates and share prices internationally.
There is another important connection with Britain.
The Bank of England has just held Bank Rate at 3.75%, but the decision was far from comfortable. Three of the nine members of the Monetary Policy Committee wanted to raise it to 4%. UK inflation reached 3.1% in August and the Bank expects inflation to rise further because of higher energy prices.
The European Central Bank has also raised its deposit rate to 2.5%, while the US Federal Reserve has raised its target range to 3.75%–4%.
Japan's move therefore comes at a particularly interesting moment. Several major central banks are becoming more concerned about inflation at the same time.
And there is a common thread running through much of this: energy prices.
The conflict in the Middle East has pushed up crude oil and, particularly importantly for Britain, refined fuel prices. Higher oil prices feed into petrol and diesel. Diesel then affects the cost of transporting goods, farming, construction and manufacturing. Those higher costs can eventually appear in shop prices.
Central banks cannot produce more oil or repair disrupted supply routes. What they can do is try to stop an energy shock from becoming permanently embedded in inflation through wages and wider price increases.
That is why interest rates can rise even when higher rates themselves make life more difficult for households and businesses.
The danger is that the world could end up with higher inflation and weaker economic growth at the same time.
For Britain, the Bank of Japan's decision does not mean that UK rates automatically have to rise. The Bank of England sets rates according to British inflation, wages, employment and economic conditions.
But global financial markets are interconnected.
If Japanese rates continue rising, some international money could return to Japan. That could affect currencies and bond markets elsewhere. If US, European and Japanese rates all remain higher for longer, borrowing costs globally can remain under pressure.
The Japanese decision is therefore another sign that the era of ultra-cheap money may be firmly behind us.
For British households, the immediate issue remains inflation rather than Japan. But the two are connected through the global financial system.
The big question now is whether the energy shock fades, allowing central banks eventually to reduce rates, or whether higher fuel prices become embedded in the cost of almost everything we buy.
If the latter happens, the Bank of Japan's latest increase may prove to be just one part of a much wider global interest-rate story.