For decades the Bank of Japan was the odd one out among the world’s central banks, keeping interest rates at or below zero while others raised them. Its slow shift away from those emergency policies has become one of the biggest stories in global markets, moving the yen, Japanese shares and bond yields far beyond Tokyo.
What the Bank of Japan does
The Bank of Japan, often shortened to the BoJ, is Japan’s central bank. Like the Bank of England or the US Federal Reserve, it sets short-term interest rates, manages the money supply and aims to keep prices stable. Its official goal is inflation of 2 per cent a year. Policy is decided by a nine-member board led by the governor, which meets eight times a year.
The long fight with deflation
From the 1990s onwards Japan struggled with deflation, where prices fall rather than rise, after a property and stock market bubble burst. Falling prices encourage people to delay spending, which slows the economy further. To fight this, the BoJ cut rates to zero, then below zero, and bought huge quantities of government bonds and even shares through funds. For years it also capped long-term bond yields, a policy known as yield curve control.
Those measures kept borrowing costs extremely low and helped weaken the yen, but inflation stayed stubbornly below target for most of that period.
The turn towards higher rates
That began to change in the 2020s as global inflation rose and wages in Japan started to climb. The BoJ ended negative rates, scrapped yield curve control and began raising rates gradually. Each step has been cautious, because Japan carries a large government debt and the bank does not want to shock the economy.
Inflation data now matters enormously for its decisions. In October 2026, figures showed Japan’s core inflation rising to 2.1 per cent, back above the 2 per cent target for the first time in nine months, keeping a possible rate rise in focus ahead of the bank’s meeting at the end of the month.
Why the BoJ moves global markets
Japan is one of the world’s biggest creditor nations, and Japanese investors hold vast amounts of foreign bonds and shares. When Japanese yields rise, some of that money can come home, which can push up yields elsewhere, including in the US and UK.
The yen is also heavily used in the carry trade, where investors borrow in a low-yielding currency to invest in higher-yielding assets. A surprise BoJ rate rise can strengthen the yen sharply and force those trades to unwind, causing wider market turbulence.
What traders watch
Traders focus on the policy statement and the governor’s press conference after each meeting, the quarterly outlook report with its inflation forecasts, and speeches by board members. Japanese inflation and wage data, particularly the spring wage negotiations, are key inputs. USD/JPY and Japanese government bond yields usually react first.
The bottom line
The Bank of Japan has moved from the world’s most aggressive easing towards cautious tightening, and every step ripples through currency and bond markets globally. Understanding its thinking helps explain moves in the yen and beyond. If you want to see how prepared you are for central bank days, take the free Samuel & Co Trading Trader Assessment.
