Bank of Japan raises interest rates to 31-year high; here’s how this impacts Indian investors

The Bank of Japan, after its monetary policy meeting held on Friday, September 18, decided to raise the key benchmark interest rates for the country’s economy to its highest level in the past 31 years as the central bank tries to navigate rising cost pressures.

In line with market expectations, the Bank of Japan (BoJ), with a majority of 7-2 votes, decided to increase the interest rate by 25 basis points (bps) to touch 1.25% for the first time since 1995 in its September policy, compared to the previous 1% level.

The monetary policy action comes days after the United States Federal Reserve earlier this week decided to hike interest rates by 25 bps for the American economy, citing prevailing inflation concerns in the market amid a healthy job market and economic growth in the country.

BoJ’s move to hike its key rates comes at a time when central banks around the world are on a hiking trend amid higher global energy prices, along with volatile supply chain dynamics due to the US-Iran conflict in West Asia.

“At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by a 7-2 majority vote, the Bank will encourage the uncollateralized overnight call rate to remain at around 1.25%,” as per the official statement.

The Bank of Japan started increasing its rates back in 2024 and has so far raised rates six times in the last 2.5 years amid economic challenges like a weaker Yen, rising inflation, and a declining workforce in the country.

Market experts said that the BoJ is expected to continue increasing rates, as the new inflation concern due to global energy price spike in a country with historically low inflation is likely to add to the pressure.

Will this impact yen carry trades?

BoJ’s latest rate hike was fully in line with market expectations; hence, experts predict that this will add no immediate pressure to yen carry trades, as with the US Fed’s rate hike, the US-Japan rate gap has not narrowed in any way.

“Since the Fed also hiked this week, the US-Japan rate gap has not narrowed. That means there is no immediate pressure on yen carry trades, and no repeat of the August 2024 style unwind today,” said Viram Shah, Founder and CEO of Vested Finance.

Shah also said that as the rate hike was expected, the broader signal was the reaction, with the Japanese Yen weakening to around 156.6 per US dollar and bond yields falling to around 2.95% on Friday.

In simple terms, a yen carry trade is when investors borrow debt in Japanese Yen at severely low interest rates and then convert those into another currency's high-yield instruments, like US Treasuries, to make a profit in the gap as long as the underlying currency remains largely stable.

“With Japanese 10-year yields near 3%, Japanese institutions have more reason to keep money at home. They are large buyers of US Treasuries, so this is one more source of upward pressure on US long-term yields, and high yields are what rate-sensitive growth stocks are most exposed to right now,” said Shah.

How does BoJ rate hike impact Indian investors?

The near-term impact for Indian investors is expected to be on currency rates. With a firm US dollar, it is expected to add downward pressure on the domestic currency, the Indian rupee, amid high demand for safe-haven bets and capital outflows.

“For Indian investors with US exposure, the near-term effect is a firm dollar. The thing to track is the US 10-year yield,” said Viram Shah.

Shedding some light on the global tightening trend, Umesh Sharma, CIO-Debt, The Wealth Company Mutual Fund, earlier said that central banks around the world increasing their key rates shows a broader trend in the market, with seven of the eight developed economies already in a rate-hike cycle.

Looking ahead towards the first full week of October 2026, Sharma also predicts that the Reserve Bank of India (RBI) is also expected to raise its interest rates in the forthcoming meetings.

In the last monetary policy outcome, the RBI forecast that the central bank expects inflation in the country to keep rising through the second half of the year to peak in the third quarter before there is any potential for a pullback, considering whether or not the conflict ends by then.

The rate hikes, combined with dented investor sentiment and global monetary policy tightening, are all expected to weigh down equities in both developed and emerging markets, with some extent of it already being priced in, causing high volatility.

Higher interest rates prompt a shift of investments from high-risk assets to safer bets, driving a huge chunk of outflows from equity markets. At a time of geopolitical uncertainty, a high interest rate environment can further impact the sentiment for emerging markets.