A line in the sand for the world’s largest creditor has been breached

July 6, 2026 — 12:01pm

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Last week the Japanese yen crashed to its lowest level against the US dollar in 40 years, breaking through what was thought to be the Bank of Japan’s “line in the sand”. The yen’s weakness has implications for the rest of the world’s economies and financial markets, particularly America’s.

The yen crashed through 162 yen to the US dollar – the BoJ’s “red line” – hitting 162.51, before edging back up, to just above 161 yen to the dollar later in the week, when US payroll data suggested that the case for imminent US interest rate rises may have weakened.

There is a strong nexus between the US economy and its interest rates and currency, and Japan’s. The interest rate differential – the relationship between US and Japanese bond yields, drives the currencies’ relationship.

For decades, with the BoJ’s policy rate negative during Japan’s post-1980s era of economic stagnation, capital has flowed out of Japan in search of higher yields elsewhere, most notably in the US. The Japanese government, insurers, pension funds and individuals collectively hold more than $US1.2 trillion ($A1.73 trillion) of US government bonds.

It is the interest rate differentials, particularly the spread between US and Japanese rates, that created the decades-long “carry trade,” where foreign investors have borrowed cheaply to invest in higher-yielding assets elsewhere – government bonds, shares, property and other assets.

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Japan has effectively been a source of ultra-low-cost funding for the rest of the world.

That started to change two years ago, when the BoJ raised its policy rate from........

© Brisbane Times