How will rate increase in Japan affect capital flow in global financial markets? - South China Morning Post

Japan's exit from negative interest rates marks a significant shift for global capital flows, as the country has long been a source of inexpensive funding for international investors. For years, near-zero borrowing costs in Japan encouraged what is often described as a carry trade: borrowing in yen and investing in higher-yielding assets abroad. A rate increase raises the cost of that strategy, which could prompt some investors to reconsider positions funded in yen.

The key question for markets is how quickly and how far Japanese yields rise relative to those in other major economies. If the gap narrows, some capital that flowed out of Japan may be drawn back, with potential effects on currencies, bond markets, and asset classes that have benefited from Japanese investment.

That said, the scale of any reallocation depends on the pace of further policy moves, the interest-rate differential with other economies, and investor expectations. Markets will be watching Japanese monetary policy guidance and yield movements closely, since even a gradual normalization could influence global funding conditions over time.