Global Economy Faces New Price of Money

For decades, Japan was a primary source of cheap capital, but this era has now concluded. The Bank of Japan's move to increase interest rates in August 2024, after years of near-zero rates, sent shockwaves through global markets. This policy shift disrupted the yen's role as a major funding currency, influencing investments in stocks, bonds, and emerging markets worldwide.

As Japanese yields have climbed significantly, approaching levels not seen in decades, the cost of long-term borrowing has risen globally. US 30-year Treasuries have surpassed 5.3 percent, British gilts are nearing 6 percent, and similar pressures are evident in France and Germany. This broad increase in long-term borrowing costs suggests a fundamental shift rather than isolated incidents.

The global economy, accustomed to exceptionally low interest rates, now faces a "new price of money." This transition impacts governments, corporations, and investors as debt accumulated during the cheap money era faces refinancing at higher rates. Even gold prices have shown resilience amidst rising yields, as investors seek assets free from sovereign liability and fiscal uncertainty.

The most plausible future involves a gradual normalization where Japanese capital is less available internationally. This means higher yields persist, impacting investment hurdles for housing, infrastructure, private equity, and technology. Policymakers face the challenge of managing this transition, with potential interventions to influence borrowing costs.