Why Global Investors Are Watching What Japan Does Next

Japan’s central bankers meet this week, and what they decide has the potential to move markets around the world.

That’s because Japan is an outlier among major economies. While policymakers in the United States and elsewhere either are preparing to cut interest rates or have already done so, the Bank of Japan is only just beginning to raise them.

“Japan is in a different world,” said Kei Okamura, a portfolio manager based in Japan at the investment firm Neuberger Berman.

The Bank of Japan cut interest rates below zero in 2016 and kept them there until March, when it announced the first rate increase in 17 years, as the economy showed signs of recovery from anemic growth and low inflation. Economists believe the central bank might raise rates again at its upcoming meeting, which concludes on Wednesday.

Policymakers at the Federal Reserve will meet later the same day to consider a rate cut to take the brakes off the U.S. economy. Even if both central banks keep rates steady on Wednesday, most investors believe that they will act before too long, and market-based interest rates have moved accordingly.

The combination of a rise in Japanese interest rates and a decline in U.S. rates would compress a big gap — or spread, in market lingo — that investors have sought to exploit. A lot of money moves around the world based on tiny shifts in rate spreads: The dollar-yen is the second most commonly traded pair of currencies in the world, after the dollar-euro, accounting for more than $1 trillion in foreign exchange transactions per day.