The End of Japan’s Negative Rates Will Be a Slow-Moving Tsunami

Japan’s stocks have reached levels that haven’t been seen for 34 years . The country is likely to hit another milestone soon: Its central bank could raise interest rates for the first time in 17 years as soon as Tuesday.

Higher, and positive, Japanese rates won’t reshape markets overnight. But the long-term effects could be profound, particularly if U.S. growth heads structurally lower for any reason, further narrowing the yield advantage of many U.S. assets. Japan is the single largest overseas holder of U.S. Treasurys, a major overseas lender, and an export heavyweight whose corporate earnings—and stocks—have been significantly supported by the ultra cheap Japanese yen. More Japanese capital staying at home could eventually impact the price of everything from U.S. mortgages to infrastructure finance in the developing world.

For much of the past two years, Japan has swum against global monetary tides, maintaining its ultra low interest-rate regime. But now, as most other major central banks are about to cut rates, the Bank of Japan is poised to break the trend again. Domestic media reported over the weekend that Japan’s central bank will end its negative interest rates, which have been in place since 2016, during its policy board meeting on Monday and Tuesday.

The decision would come after mounting evidence that the job market is on an increasingly strong footing , after years of stagnant wage growth. Unions secured an average salary increase of 5.28% , according to the first-round results of Japan’s annual spring wage negotiations, the Japanese Trade Union Confederation said last week. For the entire decade ending in 2022, the final annual increase never exceeded 2.4%.

Much likely won’t change in the short term. The Bank of Japan will probably pace its rate increases slowly: The past couple of years have, if anything, reaffirmed its reputation for moving slowly and deliberately. Moreover, while inflation is still high by Japanese standards—2.2% in January—it has already cooled from the peaks of last year.

Japanese bond yields have picked up, but they are still substantially lower than in the U.S. The rate differential between 10-year government bonds in the U.S. and Japan stands at 3.5 percentage points. That is significantly lower than the 4.2-percentage-point gap of a few months ago, but still way higher than the 1.5 percentage points of three years ago.

Even so, a narrowing rate gap—especially if the Fed cuts rates later this year, as seems likely—will support the Japanese yen . That could damp enthusiasm for rip-roaring Japanese stocks . They would become more expensive in dollar terms for foreign investors, who have been significant drivers of the rally. A stronger yen would also hit profits at some Japanese companies , especially big exporters.

Likewise, gradual interest-rate increases in Japan probably won’t change investment flows much in the short term. But it could be a different story down the road if the shift back to positive rates proves sustainable.

Japanese individuals and companies have been big investors abroad in search of higher yield for decades. The country’s foreign-portfolio investments stood at the equivalent of $4.2 trillion at the end of last year. A big chunk of that comes from Japanese pension funds and insurers, who would suddenly have more attractive options at home. Japanese investors, for example, hold around $1.1 trillion of Treasury bonds, making them the largest foreign owner.

Japanese investors have been scouring the globe for better returns for as long as most investors can remember. If that starts to change, the effects will be felt nearly everywhere—sooner or later.

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

The End of Japan’s Negative Rates Will Be a Slow-Moving Tsunami

Long-term effects of positive Japanese rates could be profound—on everything from mortgage rates to U.S. government finances

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.