Editorial montage of Japanese flag and Japanese yen cash banknotes.
Javier Guersi | Moment | Getty Images
Fitch Solutions’ BMI said in a recent report that the Bank of Japan will take a more cautious approach to raising interest rates to avoid a rapid appreciation of the yen following the recent global market turmoil.
“We expect the Bank of Japan to take a more cautious approach and only raise interest rates by 25 basis points to 0.50% this year, down from our previous forecast of 50 basis points,” BMI analysts said in a note on Wednesday.
Bank of Japan raises interest rates The unwinding of popular yen carry trades led to a sharp sell-off in global markets last Monday.
Japan’s benchmark Nikkei 225 Index It plunged 12%, its worst single-day performance since 1987.
An arbitrage trade is an operation in which investors borrow money in a currency with a low interest rate, e.g. yenand invest it in higher-yielding assets. This trading strategy has gained increasing attention in recent years.
A weaker yen has helped support stocks, while a rapid strengthening of the yen could lead to greater volatility.
After market turmoil, Bank of Japan Deputy Governor Uchida Shinichi issued a statement Confirming that the bank will not raise policy rates amid market instability.
BMI predicts that the Bank of Japan will only be able to raise interest rates by 25 basis points in 2025, while the Federal Reserve is expected to cut interest rates by about 200 basis points to 3% next year. BMI said this means the Bank of Japan will be limited in how much it can raise interest rates, as this could lead to a sharp strengthening of the yen.
The report added: “This means that interest rates will reach 0.75% at the end of 2025, which is lower than the Bank of Japan’s final rate of 1.00%.”
On July 31, the Bank of Japan raised its benchmark interest rate to “around 0.25%” from the previous range of 0% to 0.1%. this Bank of Japan raises policy interest rate for first time in 17 years in March.
The yen has lost about 2% of its value since August 5 and is currently trading at 147.42 against the dollar.
