The Yen As A Global Risk Switch: Japan's Normalization And Geopolitical Spillovers

Japan's exit from ultra-low interest rates is turning the yen from a cheap, stable funding tool into a global "risk switch"—a variable whose abrupt movement can quickly change investor positioning, funding costs, and policy responses across markets. Since the Bank of Japan (BOJ) began normalizing policy in March 2024, yen and Japanese government bond (JGB) moves have become more consequential as they now intersect with record-breaking defense spending, alliance management with Washington, and global market stability, with implications for sovereign borrowing costs, cross-border deleveraging, exchange-rate intervention pressure, and alliance coordination. Normalization will increase the likelihood of yen and JGB volatility, raising the risk of carry trade unwinds and global portfolio repricing; because this is unfolding alongside fiscal expansion and diplomatic pressures, "Japan shock" risk is no longer just a domestic macro story but a geopolitical one. In an era of