A rate hike in the Japanese Yen spells trouble for gold — and the logic behind it is actually quite straightforward.

In the global financial markets, the yen has long served as a low-cost funding currency. The carry trade, exceeding $3 trillion, relies on it — traders borrow nearly zero-cost yen, convert to dollars, and invest in assets like gold to arbitrage. This model has operated for years with calm and stability. But once Japan decides to raise interest rates, the game changes.

What does a surge in borrowing costs mean? The arbitrage opportunities are squeezed tightly. Investors can no longer profit from interest rate differentials and instead face potential losses. The only way out is to close positions — sell gold and convert back to yen to pay off debts. This concentrated sell-off creates a wave. During Japan’s interest rate hike in July 2024, the daily decline in NY gold futures approached 4%, illustrating how quickly the market reacts. By December 9, 2025, when Ueda Kazuo signaled a rate hike, NY gold futures instantly fell below $4,200. The contrast clearly shows the transmission effect.

The issue isn’t only that. Yen appreciation typically depresses the dollar, but the massive repatriation of short-term funds and liquidity tightening can reverse and push the dollar higher. When the dollar strengthens, gold priced in USD becomes more expensive, naturally reducing its attractiveness. Plus, rate hikes increase the opportunity cost of holding gold — funds seeking fixed income will turn to bonds. At this point, gold’s competitiveness becomes somewhat strained.

That said, Japan’s economy itself faces recession pressures, with real wages still declining and limited room for rate hikes. In the medium to long term, gold’s role as a safe-haven asset remains unshaken. But in the short term, the wave of carry trade unwinding and liquidity shocks triggered by the yen’s rate hike is indeed a hurdle for gold bulls.