Japan's interest rate policy adjustments may have an impact on the world.

According to the Nihon Keizai Shimbun dated July 31, there is a growing sense of caution around the world regarding the Bank of Japan's (central bank) policy adjustments. The 500 trillion yen (about 3.5 trillion dollars) of easing funds that flowed overseas in a low interest rate environment may become a catalyst for flowing back into Japan. While the Bank of Japan's monetary easing policy has long played a role in stabilizing the financial markets, its current actions may now become a major factor influencing the global market.

Nick Timiraos, a reporter for the US Wall Street Journal, quoted a former Federal Reserve Board (FRB) official and tweeted that the Bank of Japan's policy adjustments are a "significant change that affects the world."

In fact, the global bond market was very unstable on the 28th. The 10-year bond yields in Australia temporarily rose by 0.55 points, and in the Philippines and Malaysia, they rose by 0.1 points and 0.035 points respectively.

Why does Japan's policy adjustments affect countries across the sea? According to the Ministry of Finance's statistics on external assets and liabilities, the overseas portfolio investments of domestic investors reached 531 trillion yen by the end of 2022. As a result of Japan implementing ultra-monetary easing policies and the normalization of the low interest rate environment, capital outflows accelerated, and overseas investment in the past 10 years increased by about 70%.

The Bank of Japan has been flexibly implementing "Yield Curve Control" (YCC), and there is a possibility that the long-term yields may exceed the 1% mark that has not been reached since 2013.

For Japanese investors, if the yields of Japanese government bonds, which are not affected by exchange rate fluctuations, rise, the attractiveness of overseas assets will relatively decrease. The flexible operation of YCC may lead to a return of funds to Japan, and the world's interest rates are thus exposed to upward pressure due to this prediction.

Global financial authorities have pointed out this risk. A report on the stability of the financial system released by the European Central Bank in May stated that if Japan takes measures to promote financial normalization, there is a possibility of calling back investment funds.

Specifically, the reasons include the reduction of arbitrage trading aimed at returns from interest rate differentials, the rise in domestic bond yields, the relative decline in the attractiveness of European and American bonds, the fall in the price of domestic bonds in Japan, and the deterioration of investor risk sentiment. There is also the possibility of Japanese investors who originally invested in overseas bond funds returning to the domestic market.

In April, the International Monetary Fund (IMF) compiled the "Global Financial Stability Report" and analyzed that the Bank of Japan's 10 years of monetary easing had prompted Japanese investors to invest overseas. It pointed out that if the Bank of Japan adjusts its monetary easing policy, many countries and regions including Australia, the euro zone, the United States, Indonesia, and Malaysia could potentially face capital outflows.