Japan's '1%' Interest Rate Era: Why is the Global Financial Market on Edge?

Lead: Did you know that money also has a ‘price tag’?

Imagine this. You go to a bank to borrow a large sum of 100 million won. But what if the bank employee smiles and says, “You don’t even have to pay the price of a cup of coffee in interest for a year. In fact, we will give you a little more money in exchange for keeping it for you.” Does it sound like a nonsensical story out of a fairy tale or a movie? Surprisingly, however, in neighboring Japan, a time when the cost of borrowing money was almost free or even negative has persisted for a very long time.

Just as we pay a price when we buy goods, we must also pay a price when we borrow money. We call it ‘interest,’ and the most important price tag that serves as the standard for these interests in a country’s economy is called the ‘Benchmark Interest Rate (the basic price assigned to a country’s money and the core interest rate determined by the central bank).’

Recently, the front pages of global economic news are covered with stories about Japan. This is because a proper ‘price tag’ has finally begun to be attached to Japan’s money, which seemed like it would be free forever. Just as you would be surprised if your smartphone’s voice assistant suddenly became as smart as a human and started a conversation, Japan’s interest rate, which seemed like it would never move, is making a massive move and threatening to shake up the global economic landscape. Let’s find out exactly what is happening and why the whole world is so on edge, easily and kindly.

Why It Matters: The floodgates of a massive dam open

Let’s start with the most important latest news. According to media reports, the Bank of Japan (BOJ), Japan’s central bank, is reported to have set a policy to raise the benchmark interest rate at the Monetary Policy Meeting to be held over two days on the upcoming 15th and 16th [Bank of Japan expected to raise benchmark interest rate by 0.25%p to 1.0% next week : Nate News](https://news.nate.com/view/20260609n26314). Specifically, it is understood that there is a very high possibility of a surprise hike of 0.25 percentage points (p) from the current policy rate of ‘around 0.75%’ through a majority vote ["Bank of Japan likely to raise interest rate by 0.25%p to 1% next week"... Highest in 31 years - SBS Biz](https://biz.sbs.co.kr/article/20000315469).

As a result, the new benchmark interest rate is expected to be 1.0% [Bank of Japan expected to raise benchmark interest rate by 0.25%p to 1.0% next week](https://www.newsis.com/view/NISX20260609_0003662507).

Some of you might tilt your heads and think, “Only 1%? Isn’t that an incredibly low figure compared to our country’s deposit or loan interest rates?” You are right. Looking strictly at the absolute number, 1% is still a very low interest rate that is hard to feel. However, when it comes to interest rates, ‘context’ is always much more important than ‘numbers’. To use an analogy, it is like a giant who had been lying down their entire life finally getting up and taking their first step.

If the policy interest rate is raised to around 1.0% through this meeting, it is a tremendous historical event, recording the highest level in 31 years since September 1995 [Japanese Media "Bank of Japan likely to raise interest rate to 1.0% next week"](https://news.tvchosun.com/site/data/html_dir/2026/06/09/2026060990314.html). In human terms, the world of high interest rates, which a newborn baby had never seen until becoming a thirty-one-year-old adult worker, is finally opening up again in Japan ["Bank of Japan likely to raise interest rate by 0.25%p to 1% next week"... Forecast to be the highest in 31 years | Yonhap News](https://www.yna.co.kr/view/AKR20260609133300073). This is a shock similar to a massive dam that had been tightly closed for over 30 years finally developing a large crack and beginning to spout a terrifying stream of water.

The Explainer: Why had Japan’s interest rate stopped, and what is the most feared ‘butterfly effect’?

The stopped clock and the pressure of rising prices

Then why had Japan been unable to raise its interest rates for such a long time? In the past, Japan fell into a deep, cold economic swamp known as the ‘lost decades’, where prices did not rise and economic growth came to a halt. Because the economy was sick and frozen, the central bank had to drag the interest rate down to the bottom so that people and companies could easily borrow money to build factories and consume. They even introduced an extreme ‘negative interest rate policy’ where they did not receive any interest for lending money, or even penalized deposited money.

However, the Bank of Japan finally fired the first signal toward economic normalization by abruptly ending this negative interest rate policy in March 2024, after 17 long years [Bank of Japan likely to raise interest rate by 0.25%p to 1% next week - MSN](https://www.msn.com/ko-kr/news/other/일본은행-다음-주-금리-1-로-0-25-p-인상할-듯/ar-AA25bOhj). Later, in July of the same year, the benchmark interest rate was raised from the 0~0.1% level to ‘around 0.25%’ [Bank of Japan likely to raise interest rate by 0.25%p to 1% next week - MSN](https://www.msn.com/ko-kr/news/other/일본은행-다음-주-금리-1-로-0-25-p-인상할-듯/ar-AA25bOhj), and most recently, in December 2025, the short-term policy interest rate was raised from ‘around 0.5%’ to ‘around 0.75%’ [Bank of Japan freezes benchmark interest rate at 0.75%⋯ Economic growth forecast cut in half to 0.5% - eToday](https://www.etoday.co.kr/news/view/2579983). Local media reported extensively that the Bank of Japan had finally broken the ‘solid wall of 0.5%’ for the first time in 30 years [Bank of Japan raises benchmark interest rate to 0.75%... Broke the '0.5% wall' for the first time in 30 years (Comprehensive) | Yonhap News](https://www.yna.co.kr/view/AKR20251219077752073).

The real reason why Japan is going out of its way to raise interest rates is ‘rising prices’, which threatens our daily lives. According to reports, the export-import price index (an indicator showing prices when buying and selling goods with foreign countries) for May has been changing due to the impact of high oil prices, putting strong pressure on the economy [Bank of Japan likely to raise benchmark interest rate by 0.25%P | Hankyung](https://www.hankyung.com/article/2026061452911). When the price of oil goes up, transportation costs and supermarket prices naturally follow suit. When overall prices try to soar out of control like this, the most powerful weapon the central bank pulls out like a firefighter is a ‘interest rate hike’, which absorbs money from the market by increasing the interest on money.

The ‘Yen Carry Trade Liquidation’ that makes the world tremble

It’s an internal price issue in Japan, so why are investors in the US, Europe, and our country tense? To understand this phenomenon, you must know the term ‘Yen Carry Trade Liquidation’, the most terrifying magic of modern finance.

Simply put, imagine there is an angelic ‘Pawnshop A (Japan)’ in our neighborhood that only charges 100 won in interest when lending money. On the other hand, in the neighboring town, there is a ‘Bank B (US or other high-interest countries)’ that gives 50,000 won in interest every year if you deposit money. What would you do? Naturally, you would borrow a ton of money from Pawnshop A, put it in Bank B, sit back, and pocket the interest margin. This technique of borrowing Japanese yen in bulk because the interest rate is overwhelmingly cheap (Carry) and investing it in various foreign assets with much higher yields (Trade) is called the ‘Yen Carry Trade’.

But a terrible twist occurs. The quiet Pawnshop A suddenly declares, “From now on, we will also sharply raise the interest on the money we lent to 1%!” Investors who hear this news fall into a panic, fearing that their interest burden will grow. Before it is too late, they rush to Bank B in the neighboring town, withdraw their deposits, sell off their stocks to get cash, and hurriedly return to Pawnshop A to pay off their debts.

The process of hastily selling off invested assets and withdrawing money to pay off debts like this is called ‘Liquidation’. The problem is that massive global funds that control the world do this at the same time. Since trillions of won of bulk money drain out all at once, the global stock market inevitably crashes and suffers a huge shock. There are widespread concerns that if the benchmark interest rate is raised at the upcoming meeting, this ‘Yen Carry Trade Liquidation’ situation could recur [Bank of Japan likely to raise benchmark interest rate by 0.25%P | Hankyung](https://www.hankyung.com/article/2026061452911).

Where We Stand: The dilemma of halved growth rate and lessons from the past

Despite this situation, the Bank of Japan’s position is not entirely comfortable either. This is because if they forcefully raise interest rates, Japan’s own domestic economy, which is barely holding on, could collapse.

At a meeting held at the end of April 2026, just two months ago, the Bank of Japan gave up raising interest rates and froze the benchmark interest rate at the existing ‘around 0.75% level’ [Bank of Japan freezes benchmark interest rate at 0.75%⋯ Economic growth forecast cut in half to 0.5% - eToday](https://www.etoday.co.kr/news/view/2579983). Furthermore, at the time, the Bank of Japan halved its economic growth forecast for the country to 0.5%, half of its original expectation [Bank of Japan freezes benchmark interest rate at 0.75%⋯ Economic growth forecast cut in half to 0.5% - eToday](https://www.etoday.co.kr/news/view/2579983). They essentially admitted that the stamina of the Japanese economy is incredibly weak.

Therefore, the Bank of Japan is currently very cautious. Summarizing reports from media outlets such as Nikkei, the dominant view is that a benchmark interest rate hike will be executed at the meeting on the 15th and 16th ["Bank of Japan to raise benchmark interest rate next week"... Highest level in 31 years - Maeil Business Newspaper](https://www.mk.co.kr/news/world/12069820). Compared to the maximum hike range in 1990, about 30 years ago, when the interest rate was suddenly raised by a whopping 1.75 percentage points to catch the real estate bubble [Bank of Japan raises benchmark interest rate to 0.75%... Broke the '0.5% wall' for the first time in 30 years (Comprehensive) | Yonhap News](https://www.yna.co.kr/view/AKR20251219077752073), this 0.25 percentage point hike is closer to a cautious ‘baby step’ as if walking on thin ice.

What’s Next: The morning of a new economy, what should we watch out for?

In conclusion, the Monetary Policy Meeting scheduled for the 15th and 16th is not just a simple event in a neighboring country. It is a massive turning point where the ‘1% Interest Rate Era’, which had been sealed away for a distant 31 years, opens again.

Massive yen funds that had spread widely in the global financial market, armed with cheap interest, will start packing their bags and returning to Japan upon hearing the news that interest rates have gone up. It is time to carefully watch what massive waves this great migration of capital, namely the ‘Yen Carry Trade Liquidation,’ will bring to the global stock market, real estate, and our investment wallets.

AI’s Take: MindTickleBytes AI Reporter’s Perspective

Although the number 1% may not seem large enough to collapse the global economy tomorrow morning. It is still a very low level compared to the benchmark interest rates of other major countries. However, when looking at economic phenomena, what is more important than the size of the numbers is ‘directionality’.

The fact that the timetable of Japan, a massive economic powerhouse that had been stalled for decades, has started running normally again has significant implications. This is not simply a story about Japan’s prices and interest rates alone, but a firm signal that the massive flow determining which country and which assets global capital will move toward is fundamentally changing. This change of ‘1%’, which seems as small as the price of a cup of coffee we drink today, will be deeply recorded in history as a critical inflection point that will completely shake up our daily lives and the landscape of the financial market in the future.

References

1. [Bank of Japan likely to raise benchmark interest rate by 0.25%P | Hankyung](https://www.hankyung.com/article/2026061452911)
2. [Bank of Japan likely to raise interest rate by 0.25%p to 1% next week - MSN](https://www.msn.com/ko-kr/news/other/일본은행-다음-주-금리-1-로-0-25-p-인상할-듯/ar-AA25bOhj)
3. ["Bank of Japan likely to raise interest rate by 0.25%p to 1% next week"... Highest in 31 years - SBS Biz](https://biz.sbs.co.kr/article/20000315469)
4. [Bank of Japan expected to raise benchmark interest rate by 0.25%p to 1.0% next week](https://www.newsis.com/view/NISX20260609_0003662507)
5. [Bank of Japan expected to raise benchmark interest rate by 0.25%p to 1.0% next week : Nate News](https://news.nate.com/view/20260609n26314)
6. [Japanese Media "Bank of Japan likely to raise interest rate to 1.0% next week"](https://news.tvchosun.com/site/data/html_dir/2026/06/09/2026060990314.html)
7. ["Bank of Japan likely to raise interest rate by 0.25%p to 1% next week"... Forecast to be the highest in 31 years | Yonhap News](https://www.yna.co.kr/view/AKR20260609133300073)
8. [Bank of Japan raises benchmark interest rate to 0.75%... Broke the '0.5% wall' for the first time in 30 years (Comprehensive) | Yonhap News](https://www.yna.co.kr/view/AKR20251219077752073)
9. ["Bank of Japan to raise benchmark interest rate next week"... Highest level in 31 years - Maeil Business Newspaper](https://www.mk.co.kr/news/world/12069820)
10. [Bank of Japan freezes benchmark interest rate at 0.75%⋯ Economic growth forecast cut in half to 0.5% - eToday](https://www.etoday.co.kr/news/view/2579983)