The Bank of Japan (BoJ) is adopting a cautious approach to interest rate hikes. This decision comes in response to the rapid strengthening of the yen, which has caused significant market turbulence. The BoJ is expected to raise rates by only 25 basis points (bps) this year, bringing the rate to 0.50%. This is a downward revision from the previous expectation of a 50 bps hike.
The recent interest rate hikes by the BoJ led to the unwinding of the popular yen carry trade. This resulted in a sharp sell-off in global markets, causing Japan’s benchmark Nikkei 225 index to plunge 12%. Despite this, the Nikkei 225 has since made a strong recovery, surpassing its pre-rout levels.
Carry trades involve borrowing money in a low-interest currency, like the yen, and investing it in higher-yielding assets. This strategy has been popular in recent years, but a stronger yen could lead to increased volatility in the markets.
In light of the recent market turmoil, BoJ’s Deputy Governor Uchida Shinichi issued a statement. He assured the public that the bank would not raise policy rates amid such instability. Looking ahead to 2025, BMI forecasts that the BoJ will only raise rates by another 25 bps. This would bring the rate to 0.75%, below the expected terminal rate of 1.00%.
The BoJ’s cautious stance is also influenced by the Federal Reserve’s anticipated rate cuts next year. The Fed is expected to reduce rates by about 200 bps to 3%, which limits the BoJ’s ability to increase rates without causing further yen appreciation.
On July 31, the BoJ raised its benchmark rate to “around 0.25%” from its previous range of 0% to 0.1%. This marked the first rate hike in 17 years, reflecting the central bank’s careful balancing act between controlling inflation and maintaining market stability.
The yen has weakened by about 2% since August 5, and is currently trading at 148.930 against the U.S. dollar. As the BoJ continues to navigate these challenges, the global financial community will be watching closely.
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BOJ is taking a cautious approach to interest rate hikes to prevent rapid yen strengthening. Learn how this impacts the global market.
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