but manufacturing is struggling and business sentiment is fading under cost pressures. Meanwhile, investors are also digesting signals from Japan’s new, dovish prime minister and the added complication of potential new US tariffs, both of which are clouding the outlook for trade and investment.
Why should I care?
For markets: Volatility returns as policy shifts unsettle investors.
Japanese stocks have benefited from ultra-low rates for years, but the prospect of tighter policy is already sparking volatility. The Nikkei’s notable drop shows investors are weighing the risks of rate hikes and persistent inflation against wavering business confidence. Rate-sensitive sectors – as well as those tied to global trade – could be especially vulnerable if US tariffs escalate or Japanese rates increase faster than markets expect.
The bigger picture: Japan’s turning point could echo throughout global finance.
Japan has long served as a source of cheap capital for world markets. A shift toward higher rates may redirect investment flows, impact the yen, and disrupt Asian manufacturing supply chains. At the same time, changes in Tokyo’s political climate and US trade policy add layers of uncertainty, making Japan’s next moves a key watchpoint for global investors tracking the world’s third-largest economy as it tries to balance inflation and growth.