Bank of Japan Calms Markets With Pledge Not To Raise Rates Amid Volatility

Japan’s central bank said that it won’t be increasing interest rates amid unstable markets, sending global stocks rising Wednesday.

Japan’s Nikkei closed higher, Europe’s Stoxx 600 benchmark is gaining, and U.S. stock futures are rising after the Bank of Japan calmed investor fears of the unwinding of the carry trade and said it wouldn’t raise interest rates when capital markets are “extremely volatile.”

Deputy Gov. Shinichi Uchida said in a speech in Hokkaido, Japan, that the central bank “will not raise its policy interest rate when financial and capital markets are unstable.”

His comments come a week after Bank of Japan Gov. Kazuo Ueda said he would continue to keep raising interest rates despite the tepid consumer spending in the country. The Bank of Japan became the last major central bank to abandon its negative interest rate policy in March and last Wednesday surprised markets when it raised its policy rate by 10 basis points to 0.25%, only its second rate hike in the last 17 years.

Carry Trade Unwinding Fears Fueled Monday’s Stocks Rout

Fears of the reversal of the Japanese yen carry trade have been cited as one factor fueling Monday’s global stocks rout, apart from worries of a U.S. recession and tech giants’ overspending on artificial intelligence (AI) initiatives.

A carry trade is an investment strategy that involves borrowing the currency of a country where interest rates are low, like Japan, and investing it in a place where interest rates are high, such as the U.S. Rising interest rates in Japan would threaten that trade.