LONG-TERM Japanese interest rates are undergoing a significant change these months. Normally, I would expect the explanation to describe a change in the bond market that determines the interest rates, but the reality in Japan is different. Nonetheless, the changes are very interesting and, most likely, will have implications both for the financial markets domestically and internationally.

The big surprise happened back in December when the Japanese central bank, the Bank of Japan, announced that the interest rate cap for the 10-year maturity would be raised to 0.50 percent from 0.25 percent. Formally, it's not a rate hike, but the Bank of Japan moved the threshold price for where the central bank buys government bonds. In the financial market, this is called yield curve control (YCC). This control of long-term interest rates is the reason why I explain that the interest rates are changing and not the bond market like in other economies. Regardless of what comes first, the speculation is if the cap will be moved higher again; I argue that it's natural if it happens since the high inflation is a good reason for it.