Potential tightening could strengthen the yen, disrupt global carry trades and raise volatility in risk assets as investors reassess the path of Japanese monetary policy.
The Bank of Japan could raise interest rates twice by March, according to an ex-official, a prospect that may strengthen the yen and ripple through global markets. The potential move matters beyond Japan because a firmer yen can pressure carry trades, in which investors borrow in low-yielding currencies to fund purchases of higher-yielding or riskier assets elsewhere. If those positions begin to unwind, volatility can spread across foreign exchange markets and risk assets more broadly.