BOJ Is Normalizing. Here's What 6 Analytical Lenses Found About the Risks Nobody Sees.
We ran the BOJ policy normalization cycle through 6 macro-specific analytical lenses — rate transmission, inflation regime, financial conditions, labor dynamics, fiscal interaction, global spillover — producing 12 signals, 5 cross-lens themes, and 5 paired conditional markets. The hedging cost trap has activated. The carry trade has unwound on the surface. Spring 2026 Shunto wage negotiations are the fulcrum.
Highest since 1995, 4th hike in 21 months
Up 87bp in 12 months (1.74x policy pass-through)
Carry trade flipped from -70K to +11K net long
Japanese investors earn less than domestic JGBs
The Bank of Japan raised its policy rate to 0.75% in January 2026 — the fourth hike in 21 months and the highest rate since 1995. After three decades of zero and negative interest rate policy, Japan is attempting something that has no modern playbook: an orderly exit from a deflationary equilibrium that reshaped global capital flows.
The surface looks calm. Financial stress indicators are low. JGB repricing has been orderly. The yen has appreciated only 2.4%. But beneath the surface, structural pressures are building that our 6 analytical lenses identified as genuinely novel — not cyclical tightening dynamics seen in other central bank cycles, but regime shifts in global fixed-income plumbing that have no recent precedent.
We built 6 macro-specific analytical lenses to surface these tensions systematically. Each lens consumed BOJ policy statements, FOMC minutes (for spillover dynamics), FRED economic data, and Ministry of Finance flow data. Each produced 2 signal assessments with evidence levels. The result: 12 signals that collectively describe a normalization process more consequential than the consensus "gradual and orderly" narrative suggests.
Our Assessment
BOJ normalization is proceeding with deceptive orderliness — financial stress is genuinely low, but structural pressure is building beneath the surface.
The hedging cost trap has activated for the first time in two decades — Japanese investors now earn 68bp less on hedged US Treasuries than domestic JGBs, reversing a multi-decade incentive structure. The speculative carry trade has fully unwound (CFTC swung 81,652 contracts in 5 weeks), but OTC institutional positions remain opaque. The spring 2026 Shunto wage negotiations — identified by all 6 lenses as the single highest-leverage catalyst — will determine whether Japan's escape from 25 years of deflationary equilibrium continues orderly or finds a disorderly release.
View the full signal dashboard, conditional pairs, and cross-lens themes
12 signals. 5 conditional market pairs. Interactive analysis page.
1. The Hedging Cost Trap
Hedged carry at -68bp vs JGBs — structural incentive for $4T+ repatriation.
US-Japan policy gap compressed 120bp to 288bp in 12 months.
For the first time in over two decades, Japanese investors earn less buying hedged US Treasuries than buying domestic JGBs. The math: US 10Y at 4.08%, minus approximately 2.52% hedge cost (3-month interbank differential), equals approximately 1.56% hedged yield — versus JGB 10Y at 2.24%. Each additional BOJ hike deepens this shortfall, converting incremental tightening into sustained dollar headwinds and creating gravitational pull for $4T+ in foreign bond holdings.
Three lenses independently converged on this as the most consequential structural development. This is not a cyclical adjustment — it is the first time since before the zero-rate era that the carry arithmetic has inverted. If Japanese institutional investors respond by repatriating even a fraction of their foreign holdings, the dollar depreciation and US Treasury yield implications extend well beyond what current consensus anticipates.
2. The Carry Trade Has Unwound — On the Surface
CFTC flipped from -70K to +11K in 5 weeks — fastest reversal since August 2024.
USD/JPY undergoing orderly structural repricing with only 2.4% yen appreciation.
3. Markets Front-Running, Economy Lagging
1.74x pass-through: JGB 10Y moved 87bp on 25bp of policy hikes.
Financial markets 3-6 months ahead; real economy lags 12-18 months.
Financial markets are front-running BOJ policy by 3-6 months: JGB yields pricing in expected hikes, OIS markets assigning 64% to an April hike. Meanwhile, the real economy shows no drag — BOJ upgraded GDP forecasts and the real policy rate remains deeply accommodative at -1.85%. But 10-16 months of cumulative rate hike transmission from the December 2025 hike remains in the pipeline.
The BOJ's decision to slow quantitative tightening from April 2026 suggests institutional awareness that combined rate and QT transmission may be accelerating beyond comfort. This is the central tension in the normalization: markets have absorbed the signal, but the real economy has not yet absorbed the effect.
4. Inflation: The Headline vs Core-Core Divergence
Headline CPI fell to 1.5% but core-core at 2.6% shows domestic dynamics intact.
Re-anchoring upward after 25 years of deflation, but process is fragile.
Headline CPI at 1.5% — below the 2% target for the first time since March 2022 — appears to undermine the case for further hikes. But the BOJ board is looking through it. Core-core CPI at 2.6% shows the domestic wage-price mechanism remains intact; the headline decline is concentrated in fading food inflation (5.1% to 3.9%) and energy normalization.
The real question: is the demand-pull phase self-sustaining, or does it require the cost-push tailwind? Shunto 2026 answers this definitively. Strong wage results above 5% validate the domestic demand thesis; weak results below 3.5% would challenge the entire normalization rationale and put the BOJ in a genuinely difficult position.
5. What All 6 Lenses Agree On
NFCI -0.568, JGB repricing orderly, no dysfunction visible.
Trade-weighted dollar down 7.6%; US Treasury rate checks introduced.
Five themes emerged independently across multiple lenses:
The Shunto Fulcrum — All 6 lenses independently identify spring wage negotiations as the highest-leverage catalyst. Strong results (>5%) validate everything; weak (<3.5%) challenges the entire thesis.
Orderly Surface, Structural Pressure Beneath — LOW financial stress and STABLE credit coexist with an activated hedging cost trap, opaque OTC positions, and FOMC-flagged hedge fund leverage.
Front-Running Markets vs. Lagging Real Economy — Asset prices adjusted substantially; 10-16 months of untransmitted real economy tightening still in the pipeline.
Hedging Cost Trap as Regime Change — Not cyclical adjustment but potential structural shift in global fixed-income plumbing comparable to end of QE.
Fiscal-Monetary Tension — Takaichi fiscal expansion (30Y JGB at 3.4%) interacts with BOJ normalization to create dual yield pressure.
What Would BOJ Reaching 1.00% Change?
The condition is BOJ raises to 1.00%+ by July 2026 (external probability: 40%). We generated 5 paired markets, each with an IF TRUE (BOJ reaches 1.00%+) and IF FALSE (BOJ stays below 1.00%) branch, then ran a 90-call model ensemble to estimate probabilities for each branch independently.
The causal effect delta — the difference between the IF TRUE and IF FALSE probability — measures how much the BOJ's rate path causally affects each downstream outcome.
How This Works
The macro analysis pipeline mirrors our equity analysis architecture but adapted for macroeconomic policy events:
6 macro-specific lenses — each with a defined analytical scope, 2 signal definitions, evidence ladder criteria, and monitoring triggers. The lenses consume BOJ policy documents, FRED economic data, Ministry of Finance flow statistics, and cross-border capital flow data from TIC reports.
Conditional market pairs — each market has two branches sharing identical resolution criteria but conditioned on opposite outcomes of the triggering event. The unconditional probability auto-updates when the external probability changes: P(Y) = P(Y|T) × P(T) + P(Y|F) × P(F).
Split-prompt ensemble — 9 independent reasoning perspectives per branch (3 Opus + 3 Sonnet + 3 Haiku), each reasoning from first principles without seeing other models' outputs. Aggregated by median with model agreement measured as 1 minus normalized standard deviation.
Explore the full interactive macro analysis
Signal dashboard, conditional pairs table, cross-lens themes, and overall assessment.