Japan's interest rate policy puts course and World Cup trip under pressure

The Japanese central bank will make a decision on the policy interest rate next week. It seems only a matter of time before interest rates rise further, giving the yen a boost. But for World Cup attendees from Japan, that will likely come just too late.

In less than two months, the Netherlands and Japan will meet in Dallas for the first group match of the World Cup. But while a trip to the United States has become somewhat cheaper for Dutch World Cup attendees in recent years due to a falling dollar, Japanese fans are actually spending more and more. Over the past twelve months, the yen has fallen by 10% against the US currency. Over the past five years, that difference is even more than 30%. A major reason for the yen's weakness is the Bank of Japan's (BoJ) decision to keep the policy interest rate very low. Recently, however, a turnaround seems to be emerging.

Interest rates below zero
Inflation in Japan is finally showing signs of life again, after hovering around zero for years. The reason for the inflationary revival dates back to the coronavirus pandemic. During lockdowns, global supply chains ground to a halt, while demand for all kinds of goods increased enormously as everyday life resumed. In Europe and the United States, inflation suddenly shot towards 10%. In Japan, it was only 4%. While central bankers in the Western world raised policy interest rates in an attempt to curb inflation, the BoJ kept them below zero for fear that inflation would evaporate again after the sudden boost.

The investment game is becoming less interesting
When it became clear two years ago that things were not moving that fast, Japanese central bankers finally dared to raise interest rates for the first time in seventeen years. That cautious step was followed by four more rate hikes. That change is crucial for currency markets. For years, the yen was used as a financing currency. Investors borrowed cheap yens to exchange them and invest in higher-yielding currencies such as the dollar. That mechanism – the so-called carry trade – structurally depressed the yen. However, this game is becoming increasingly less lucrative as the interest rate gap between Japan and the United States continues to narrow. The currency world is therefore holding its breath in the run-up to the BoJ policy meeting.

Countdown to Netherlands-Japan
On Tuesday, April 28, the interest rate decision will be made. Earlier this year, markets priced the chance of an interest rate hike at over 50%. Since then, that percentage has dropped significantly. It will be particularly interesting to hear what the banks' plans are for the rest of 2026. The BoJ Board will meet again shortly after the match against the Netherlands on June 14. There is a strong chance that interest rates will rise a notch then, while US interest rates appear more likely to fall. For currency traders, the calculation is relatively simple. A smaller interest rate gap, combined with declining carry trades and potential capital inflows, forms a powerful recipe for a stronger currency. But for Japanese fans at the World Cup, that will likely come too late.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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