Bank of Japan (BoJ)

Japan's unusual central bank

The Bank of Japan (BoJ) is Japan's central bank, and for decades it ran the world's loosest monetary policy in a long battle against deflation. Near-zero and even negative interest rates, massive bond-buying, and yield curve control — capping long-term yields — made the yen the cheapest funding currency on earth. That cheapness gave rise to the yen carry trade: investors borrow yen at almost no cost and invest the proceeds in higher-yielding assets around the world, including emerging markets like India.

Why India feels Tokyo's decisions

The carry trade is the channel that connects a BoJ meeting to the Sensex. As long as Japanese rates stay near zero, cheap yen flows into global risk assets. But when the BoJ tightens, the maths flips: the funding cost rises, the yen strengthens, and leveraged investors are forced to unwind their bets all at once — selling assets worldwide to repay yen loans.

The textbook case came in August 2024. A surprise hawkish BoJ rate hike, combined with weak US data, triggered a violent carry-trade unwind. Japan's Nikkei crashed 12.4% in a single session, its worst day since 1987. The shock rippled to India: the Sensex fell over 2,000 points and the Nifty slid towards the 24,000 level within days — even though nothing had changed in India's own economy. The trigger was entirely a Tokyo interest-rate decision.

The slow normalisation

The BoJ has since been raising rates gradually, lifting its policy rate in steps (for example to 0.75% in late 2025), framing the process as "controlled deleveraging" to avoid another disorderly August-2024-style episode. Each hike narrows the rate differential that funds the carry trade.

Why investors should watch it

For an Indian investor, the BoJ is a reminder that domestic markets are tethered to global liquidity. A tightening BoJ can drain the cheap yen funding that flows into emerging markets, pulling foreign money out of Indian equities regardless of how strong India's fundamentals are. When you see a BoJ decision in the headlines, treat it as a potential external risk to FII flows, the rupee and equity volatility at home.