Japan's long period of near-zero interest rates is ending. The Bank of Japan (BOJ) raised its policy rate to 1.25% in September, Japanese government bond (JGB) yields are at their highest in about 30 years, and Tokyo has spent a record monthly sum supporting the yen.

That raises the question of whether higher Japanese rates could squeeze credit across ASEAN. The channels to Southeast Asia are real, but the official and analyst evidence reviewed here points so far to gradual adjustment rather than a squeeze.

Where Japanese policy stands

The BOJ has moved in 25-basis-point steps. It raised its rate to 0.75% in December 2025 (ING, 19 December 2025) and held in April, when three of nine board members voted for a hike (BOJ). It went to 1.0% in June (BOJ), held in July (BOJ) and moved to 1.25% on 18 September by a 7–2 vote, effective 24 September (BOJ).

The September statement said underlying inflation "has been approaching 2 percent" and that "the Bank will continue to raise the policy interest rate". It also listed "developments in foreign exchange rates" among the risks, alongside the Middle East and AI-related demand.

Bond yields have moved faster than the policy rate. The 10-year JGB yield hit 3% on 1 September for the first time since 1996 (Reuters via Yahoo Finance, 2 September). It was about 3.09% on 8 October, with the 30-year near 4.18% (Trading Economics).

Record intervention, but a still-weak yen

Japan's Ministry of Finance (MOF) bought yen on 30 April and 4 and 6 May, spending ¥11.73 trillion (MOF). It spent a further ¥15.40 trillion between 30 July and 26 August (MOF), the largest monthly amount on record (Adnkronos). MOF data show no other intervention this year up to 28 September (Q1, July, September).

Mark Sobel of OMFIF wrote on 7 August that the US Treasury had taken the "highly unusual" step of joining the intervention, and that the yen moved from roughly 164 to 155 per dollar before drifting back towards 158 (OMFIF, 7 August). On 2 October it stood at 158.39, only about 1.5% weaker than at the start of the year (ADB Daily Market Watch).

Channel 1: Japanese banks

Japanese banks are a major source of foreign credit in the region: an AMRO staff blog estimated that banks located in Japan held 20% of total claims on ASEAN as of June 2018 (AMRO). Their consolidated foreign claims (ultimate risk basis) stood at US$5.86 trillion at end-June 2026 (BOJ release of BIS statistics, 25 September). In that quarter, according to BOJ estimates, Thailand (about -US$6.7 billion), Indonesia (-US$2.2 billion) and Singapore (-US$1.3 billion) were among the five largest falls in Japanese banks' local claims by country, on an exchange-rate-adjusted basis. That is one quarter, not yet a trend.

The BOJ's own assessment is not one of retreat. Its April 2026 Financial System Report said "foreign lending by major banks has been increasing moderately on the whole", that foreign loans make up over 30% of major banks' loan books, and that banks have stable funding bases, while being "selective" (BOJ). Higher rates at home are also expected to help these banks: S&P Global Market Intelligence projected margin expansion in 2026 and 2027 for all four Japanese lenders among Asia-Pacific's 25 largest banks (S&P Global, January 2026).

The risk was flagged years ago. The same 2019 AMRO blog urged the region to strengthen buffers against a possible pullback by Japanese banks, including one arising from a normalisation of BOJ policy.

Channel 2: Yen borrowing and samurai bonds

Yen funding is clearly more expensive. Indonesia raised ¥172.1 billion in samurai bonds in April 2026 at coupons of 2.35% (three years) to 3.23% (ten years) (Kontan, 24 April). In June 2022 it paid 0.96% to 1.45% on similar tenors (Asia Financial). Across the world, the Bank for International Settlements (BIS) found that yen-denominated credit to borrowers outside Japan contracted 4.9% in 2025, while dollar credit grew 8.5% and euro credit 11% (BIS, 30 April 2026).

Channel 3: Carry-trade unwinds

The August 2024 sell-off is the usual reference point. The BIS estimated a "rough middle ballpark of ¥40 trillion ($250 billion)" in FX carry trades going into that event, and noted that markets "stabilised quickly" (BIS Bulletin 90).

ASEAN was not at the centre of it. AMRO researchers found regional currencies were not a preferred carry target and "most ASEAN+3 currencies barely registered a reaction", with only the rupiah and won showing mild negative correlations. They warned this "should not be mistaken for immunity from future risks" (AMRO, April 2025). On 19 August 2024 the ringgit jumped 1.5% to 4.3678 per dollar, which Malay Mail called its best showing since February 2023 (Malay Mail). After the September 2026 hike, the ringgit opened mixed (Bernama, 21 September).

Channel 4: Portfolio and direct investment

Higher JGB yields give Japanese investors a reason to stay home. Reuters reported they net sold about ¥3 trillion of overseas debt in 2026 up to 22 August, the largest such outflow since 2022, though it described a gradual shift rather than large-scale repatriation, with dealers in markets such as Australia noticing weaker Japanese demand (Reuters via Yahoo Finance).

Direct investment is mixed. Japan's outward FDI rose 5.0% to US$217.8 billion in 2025, but flows to ASEAN fell 5.9% to US$24.6 billion. Singapore fell 21.1% while Vietnam rose 34.1% (JETRO Global Trade and Investment Report 2026).

What regional markets actually show

The rupiah, baht and peso have weakened more than the yen against the dollar this year, while the ringgit has weakened less, according to ADB data for 2 October. That pattern suggests factors beyond Japan are at work.

Indicator Latest Source
BOJ policy rate 1.25% (from 24 Sep) BOJ
10-year JGB yield ~3.09% (8 Oct) Trading Economics
USD/JPY 158.39 (2 Oct); yen -1.5% YTD ADB
USD/IDR 17,945 (2 Oct); rupiah -7.1% YTD ADB
USD/THB 33.71 (2 Oct); baht -6.5% YTD ADB
USD/PHP 62.60 (2 Oct); peso -6.1% YTD ADB
USD/MYR 4.09 (2 Oct); ringgit -0.7% YTD ADB
Japan FDI to ASEAN, 2025 US$24.6bn (-5.9%) JETRO

AMRO's July update said most regional currencies weakened, government bond yields "remained elevated" and "several central banks tightened policy amid inflation risks and currency pressures". It linked elevated yields to higher oil prices, fiscal concerns and changing expectations for US monetary policy, and did not cite Japan as a driver of regional market moves (AMRO, July 2026). The energy shock from the Middle East conflict also weighs on the region (see how the Iran war is hitting Asian economies).

S&P Global Ratings said in September that Asia-Pacific credit conditions remain supportive but buffers are thinning, citing energy disruption, weaker currencies, higher funding costs and risk-off capital flows; The Star's report of its findings did not name Japan as a risk (The Star, 24 September). The IMF found in October 2025 that spillovers from higher global term premia into Asian "real activity and inflation are modest" (IMF).

What to watch

  • BOJ, 29–30 October: comes with a new Outlook Report on 30 October; the next meeting is 17–18 December (BOJ). Overnight index swaps priced about a 12% chance of an October hike and around 90% by the December meeting, FXStreet reported on 7 October citing Bloomberg (FXStreet).
  • Yen near 160: OMFIF described ¥160 as Tokyo's apparent "line in the sand"; MOF publishes monthly intervention totals at month-end.
  • Japanese bank claims: whether the Q2 dip in Thailand and Indonesia persists in the next BIS data.
  • ASEAN policy rates: track moves on our central bank rates tracker.

Key numbers

  • BOJ policy rate: 1.25%, highest since 1995 (FXStreet)
  • Yen intervention in 2026 to 28 September: about ¥27.1 trillion (MOF)
  • 10-year JGB: ~3.09%; 30-year: ~4.18%
  • Japanese banks' consolidated foreign claims: US$5.86 trillion (end-June 2026, BOJ/BIS)
  • Global yen credit to non-residents: -4.9% in 2025 (BIS)

This is general information, not financial advice.

This article was researched with AI assistance and reviewed by the NDNews editorial team. It is based on official data and media reports as of 8 October 2026. It is not financial advice.