Japan's core inflation is now at 1.8% and their interest rate is set at just 0.75%. That inflation rate is something most central bankers would kill for, and those low interest rates have set off one of the most savvy arbitrage trades globally. You see, a Japanese investor can simply borrow money and invest it elsewhere where the interest rates and returns are much better. For example, you can invest in US Treasuries, which give you more than 4% in yields depending on the type. Or, if you can tolerate more risk, the S&P 500, which historically gives around 10% annually. But with rising inflation due to several factors including the oil crisis, a hike to 1% is now actively on the table, You could argue that investing outside of Japan will still be profitable, but it is all about the optics: a rise in interest payments can make investors nervous and cause them to pull out of their offshore arbitrage plays. The result? A drop in Treasury values, which spikes the yield. A spike in yield makes bonds appetizing and pulls money away from risk assets like stocks. And speaking of stocks, nervous Japanese investors could also pull out of their S&P 500 plays, causing prices to dip. Combined with the capital flight toward higher Treasury yields, this results in a domino effect: what economists call the yen carry trade unwind.(Lark Davis)