Governor Ueda Hints at Rate Hike
Market Sees 100% Probability of Increase
All Eyes on Path for Further Rate Hikes
The Bank of Japan (BOJ), Japan's central bank, is increasingly expected to raise its benchmark interest rate by the largest margin in 18 years. This is interpreted as a move to normalize monetary policy ahead of the US-Japan summit, supported by indicators such as inflation and wages aligning with expectations.
On the 22nd (local time), Bloomberg reported that at the BOJ's monetary policy meeting scheduled for the 23rd-24th, there is a high possibility that the current benchmark interest rate of 0.25% will be raised to 0.5% per annum. A benchmark rate of 0.5% would be the first since February 2007 to October 2008.
Following Japan's rate hike in July last year, concerns about a US economic slowdown and the unwinding of the yen carry trade intensified in global financial markets, causing a major stock market crash worldwide. The yen carry trade refers to borrowing low-interest yen to invest in high-interest currencies such as the US dollar. However, when Japan raised rates in July, narrowing the US-Japan interest rate gap, fears of yen carry trade unwinding spread in the market.
Since then, the Japanese government has taken a cautious stance on rate hikes, but in December last year, BOJ Governor Kazuo Ueda hinted at a rate increase, stating that "the timing for a rate hike is approaching as economic indicators are progressing smoothly."
According to Bloomberg, the overnight index swap (OIS) market fully reflects a 100% probability of a BOJ rate hike this week. This figure has more than doubled since the end of last month. In Bloomberg's latest survey, about three-quarters of economists share this view.
With investors fully anticipating a rate hike, Bloomberg reported that the focus of this meeting will be on how Governor Ueda plans the path for further rate increases. The market expects the BOJ to revise upward its quarterly inflation forecasts at this week's meeting.
Although Governor Ueda is unlikely to provide specific guidance on the rate direction, if he adopts an overly dovish (favoring accommodative monetary policy) stance, it could lead to yen depreciation and increased inflationary pressure. Bloomberg reported that this raises concerns that financial authorities may need to intervene directly in the market, heightening caution.
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